Companies with an interest in pursuing a strategy to achieve their growth objectives need to be aware that making an acquisition is likely to require new capabilities. Companies with M&A strategies are now competing against both strategic and financial investors with a great deal of experience. Breaking into the acquirer class requires several things, including:
Clearly established objectives. It is critical to have a clearly set goal for the acquisition based on the company’s growth objectives, understanding the potential of the acquisition and how it will fit into the company’s vision. Will a particular acquisition help the company to become a dominant player in a particular industry or sector, or is the acquisition meant to diversify the company’s portfolio? Is the company primarily interested in acquiring specific assets (trademarks, intellectual property, patents, etc.) from the other company, or is the acquisition intended to make better use of internal intellectual property?
Known universe of potential targets. In assessing targets, a company will need to have a solid grasp of its competitors, suppliers, and others. Acquiring a business process, people, or product from another company may be the ideal strategy in taking a company to the next level.
Rigorous due diligence. As an acquirer, a company needs the intelligence to make informed risk/reward decisions. Each acquisition requires a comprehensive evaluation of historic financial performance, key business drivers, profitability trends, and areas of potential risk. This process is most critical when the target is smaller or less mature, as their financial and internal control systems may be less sophisticated and the information provided may be less complete or transparent.
There are a number of other key factors related to an acquisition target that should be reviewed as part of the due diligence process. These include:
- Management team. Does the target company have a strong management team and has the company’s management team gotten to know them during the merger / acquisition process? There may also be a need to assess whether the existing company’s management team is prepared to assume responsibility for running the target company’s operations, unless the acquisition includes the “know how” of the organization. Determining the company’s management team’s skills are complementary to, or symbiotic with, the target company’s management strengths. Lastly, the personal chemistry between the buyer and seller is often a key indicator of the ultimate success of the acquisition. This is especially true if any of the acquired company’s management team is being retained after the deal closes.
- Reputation. Understanding how the target company is perceived in the industry and which “intangibles” are associated with the current organization, its owners, its product line, etc. If the acquisition target is an “unknown” entity with a good product, understanding where or if monies may need to be spent in creating brand name recognition will be important. This may be critical if the acquiring company already has strong brand recognition in the marketplace.
- Research and Development (R&D). The target company may hold appeal based on the cost benefits it can deliver from an R&D perspective. The acquisition may allow the spread of R&D costs across a broader product/earnings base or the purchase of a specific set of R&D opportunities/pipeline.
- Foreign vs. domestic targets. If considering the acquisition of a foreign company, there may be differences in accounting standards, labor laws, environmental laws (if applicable), etc. The implications of transfer pricing laws and international laws dictating the use of/sharing of data across borders will also need to be considered.
The right financing strategy. Sometimes, financing acquisitions directly from operations makes perfect sense. However, there may be more beneficial alternatives. Financing transactions is best accomplished by people who have successfully done it. Don’t have the bench-strength to tap the capital markets? Consider outsourcing it. Also, avoid getting caught up in the “auction frenzy” that can occur for a prized acquisition target. Savvy sellers and/or their investors will often behave in ways to drive up the price, causing potential buyers to care more about winning the deal than the economics of the deal. Price parameters should be established and adhered to.
Establishing the purchase price and financing the deal are two critical considerations. Many factors will need to be considered, including financing terms (i.e., purchase price plus an earn out, etc.) and the acquisition company’s current earnings before interest, tax, depreciation and amortization (EBITDA) or other multiples for targets in similar industries. Using earn-outs to defer payments, if the potential acquisition target does not perform as promised, should be considered.
“Companies in the greater-Boston area have participated in over 900 transactions from January 1, 2017 through Q3 2017. Looking forward, I think there will be a wealth of opportunities for well positioned growth-oriented companies to continue on their trajectory via a well-planned M&A strategy.”
-Tracy Curley, Partner, Technology & Media Industry, Boston
Successful integration of the assets. History shows that integration can be the toughest hurdle to clear, tripping up even highly experienced companies. Not only must the acquired assets be woven into existing operations, but people, company cultures, financial reporting, infrastructure, and other components need to be combined as well. Even under ideal circumstances, integration places significant stress on organizational systems.
Estimates suggest that 50 to 80% of all acquisitions that fail, do so because the companies are not well integrated. Given this, a company needs to focus on the integration process very early on, and well before the acquisition. From the moment the deal closes, the business needs to be able to start running on a combined basis.
Stay tuned for the next article centered around managing cybersecurity preparedness. Read our previous thought leadership article, Technology Companies: A Rapidly Changing Environment Demands a Customer-First Business Strategy.