Dynamic markets dramatically threaten business models. Evolution may be too slow and so many businesses are turning to revolution as CEOs of larger and mid-tier companies increasingly turn to acquisitions of even small businesses, to satisfy both their market and future customer needs. In a recent PWC survey, 45% of CEOs believed that their companies would not be viable in ten years if they stayed on their current path.
There are a lot of theories on what makes a good acquisition – not paying too much, assessing the culture correctly, carrying out the right diligence checks, and being clear on why you are buying and how it adds value to your organisation. The first element is just best practice, but being clear on why an acquisition adds value is not always easy to assess and requires you to anticipate your market and the growth opportunities better.
This is why big-ticket acquisitions can be a high-risk strategy for corporations and why they are increasingly turning to acquiring smaller companies. In a similar fashion to the biblical story of how, with agility, the smaller David takes down the giant, Goliath, Netflix approached Blockbuster Video and asked for US$50m, Blockbuster Video, baulked, but it was the wrong call. From Goliath’s defeat, we also learn that pride can lead to a fall, and one should never underestimate the long-term capabilities of smaller companies. The reality is that managers in corporations are sometimes paid for reliability and may lack the creativity to recognise where agility and disruption are needed. Smaller acquisitions may offer the right solution with relatively low risk, therefore it is worth giving them a try.
Many smaller or emerging mid-market companies possess underutilised intellectual property, teams, customers, brands, and products – a fact increasingly acknowledged by corporations. These companies may also boast sweat equity that would take years to replicate, making them far more compelling than mere ROI or EBITDA multiples. In the past year, we have successfully sold two businesses valued at under £10m to corporate entities. This success partly reflects the efficiency with which smaller acquisitions can be facilitated, but more importantly, for corporates experiencing slow organic growth and the battering of their business models, the transformation or enhancement of their models through smaller, lower-ticket acquisitions is a strategy worth pursuing.
The four corners of Mergers & Acquisitions
Ideally, good acquisitions will encompass the four corners of strategic mergers and acquisitions (“M&A”):
- Economies of scale: Long-term, usually scale-led, cost savings.
- Shareholder Value: Growth in the value of both buyer and seller through their combination via the acquisition.
- Synergy: Influence by increasing their market value and ability to cross-sell products inter-company to new customers.
- Positive disruption: Buying valuable skills and capabilities in new areas that compete with the existing business model.
Synergy and economies of scale are useful in acquisitions however they are a one-off. Corporations want to create organisations that customers champion and remain loyal to. Their old models can be staid and urgently need reinvention, while acquisitions can create agility to test and try new dimensions quickly with a lower financial risk. Positive disruption is an exciting acquisition driver for leaders seeking transformation of their core business model.
Positive disruption
If a market is growing rapidly or the business has been slow to react to the market and is falling behind, speed is of the essence. A well-planned strategic acquisition, focused on the customer and market drivers may well be a faster route to catch up and push ahead than relying on organic growth, and positive disruption.
However, they require a robust expert approach but when managed well, they offer new territories, products, expertise, and scale that can accelerate both profits and value. Additionally, acquirers can also gain strong brands, innovation, and intellectual property.
Long-term success in business hinges on the ability to anticipate market dynamics whilst recognising that the customer is the ultimate force that shapes the marketplace. In the past, the reflexive response from many corporate CEOs to dismiss acquisitions as “too small” may now be shifting, as they contemplate a wider array of initiatives to adapt and reinvent their business models, incorporating both operational and technological efficiencies. This shift in mindset and the associated management challenges are substantial and to emerge victorious, leaders must embrace a more expansive view of potential initiatives including acquisitions and be willing to simply “give it a go”. Goliath would have done well to pay more attention to David earlier on, and some CEOs are recognising this.
Contact us:
If you would like to see more information about our service offering and case studies on our recent deals, please visit our website at https://avondale.co.uk. Alternatively, if you would be interested in a free consultation with one of Avondale’s experienced M&A advisors, please call us at +44 (0)1737 240888, email us at av@avondale.co.uk or fill out the attached form and we will get in touch straight away.
