Acquisitions can propel companies to competitive advantage faster than organic growth, however, they are fickle with over half failing to achieve the expected synergy or value gain post-deal. So, how do you improve the odds and ‘buy right’? A foundation is to make sure you don’t overpay but rather than another focus on valuations, let’s examine what makes a good strategic acquisition.
Strategic Acquisitions
Strategic Acquisitions start with one fundament question, what is the strategy? What is the plan and vision and therefore does the acquisition fit or, not? This seems obvious. No one would spend millions or sometimes billions without clearly and deeply thinking why they would do it, what the benefits and motivations and outcomes are, would they? Or would they (Elon and Twitter!)? Yes, they might as acquisitions create short-term boosts, headlines, and immediate returns whereas a longer alternative organic growth strategy may be available. Also, many leaders simply are not clear on what the vision or mission within their segment is, and with abundant capital and not enough opportunity they can rush into acquisitions. Acquisitions are carried out correctly when leader CEOs are clear on:
- The mission and vision for the business.
- Market dynamics and the likely line of probability in those dynamics.
- What business the organisation is in and why and what they are not in?
- Resources and yield to generate a return on capital.
- What are the alternative organic growth strategies?
- The culture, ethos, and standards of the business today and tomorrow.
- What customers want today and tomorrow.
The winners in strategy are the ones that can see better where market dynamics are taking them with the recognition that the customer is the ultimate driver in the marketplace. Which initiatives including acquisitions fit the way your customers are thinking or are likely to think?
The four corners of M&A
Yes, we need scale, but we also need to prioritise shareholder value if we want to earn a return on the capital we have employed. The goal is to achieve synergy and economies of scale, but above all, we want to create an organisation that customers champion and aspire to. To achieve this, we need to be clear about which acquisitions we should buy. To that end, the CEO must focus on the market rather than merely following it or getting pulled into managerial, operational, or initiative roles. Ideally, good acquisitions will encompass the four corners of strategic Mergers and Acquisition (M&A):
- Economies of Scale – long-term, usually scale-led cost savings.
- Shareholder Value- Growth in both buyer and seller – value via the combination.
- Synergy – market power by increasing market value and ability to cross-sell products inter-company to new customers.
- Positive Disruption – buying valuable skills and capabilities.
The Seven Deadly Sins of Acquirers
Acquisitions have the potential to destroy shareholder value due to overestimation of the target’s value and synergy, as well as failure in due diligence and integration. Although buyers often do many things right and there are successful acquisitions, they can still go wrong. Here is a list of the top seven errors that can occur:
- Lack of ‘Guanxi’ – Trust and cooperation are built not because you signed a binding contract, but because guanxi obligates. Without guanxi business and social interactions may be impeded, highlighting the need to foster and sustain relationships based on trust, mutual benefit, and reciprocity.
- Cultural misalignment – 70% of acquisitions fail to meet CEO expectations due to failure to change and manage the people. Culture is deep values, beliefs, and how things get done, not both sides being casually dressed! In misalignment, we may also have the mistake of assuming a merger is a partnership rather than perhaps with hindsight a take-over!
- Poor Integration Support- Due diligence is seen only as checking rather than creating the strategy. The strategy suffers as deal fatigue kicks in and is not reset within the first few months. Look at the Homebase transaction in 2016 for £340 million, then in 2018 for £1.
- Paying too much or not enough? – Establishing a value is notoriously difficult. If the accountants lead you will lose the deal and if the visionary CEO controls the acquisition, enthusiasm may lead to you going bust.
- Failing to look ahead – What is the reputation of the business with its customers? What do they like or dislike and what are they thinking their spending power will be in the future?
- Deal fever- When you’ve got so much time, energy, and emotion tied up in a deal, your focus shifts from doing the right deal, to simply getting a deal done. Sir Fred the Shreds acquisition of Dutch bank ABN Amro and RBS deal was carried out despite his board’s cautionary warnings.
- Deal Fatigue- Letting the complexities overrun the commerciality, creating drag to the point where everyone forgets why the deal was agreed upon in the first place.
Multiple Arbitrage
There are opportunities, particularly in private companies, for multiple arbitrages through the acquisition and consolidation of smaller businesses at a lower value. This can be achieved either by proxy of the buyer already being valued higher creating value in the bolt-on, or through the increased size and quality of the combined profits, resulting in higher multiples. Private Equity transactions have heavily majored around multiple arbitrages the practice of increasing the value of a company without making any operational improvements to it. This is achieved either by acquiring bolt-on assets or by repositioning assets through scaling or sector changes.”
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-placed strategic acquisition, placing the customer and market drivers at the centre may well be a faster route to catch up and push ahead than organic growth; we call this positive disruption.
Deal Origination
Deal origination should not be underestimated. It requires careful research, combined with determined yet discrete reach outs. This requires a tricky blend of analyst, sales skills, and tact. It can take years to build up a network amongst the seller advisory community and the data resources. Managing acquisition projects in-house is an expensive asset for a ‘one-off’ deal therefore expert help may prove cost-effective. One common mistake made by buyers is not being clear on whom they should buy and then trying to build interest in too wide a pool. The focus essentially should include:
- Database analytics to target a short-list.
- Lateral thinking yet strategic targeting.
- Determined resourceful approaches on a multi-channel basis.
- On-going approaches to ensure awareness and iterative research.
- National and International capability.
- Discretion, sales and tact, and a persuasive buyer value proposition.
- Non-disclosure agreements at every step.
Summary
Acquisitions can sit at the heart of effective business growth. They require a robust expert approach. Done well, they offer new territories, products, expertise, and scale that can accelerate both profits and value. Alongside, acquirers can gain strong brands, innovation, and Intellectual property. In the current climate of slow growth ‘buying right’ offers a viable alternative to organic growth. They are fast, and furthermore, competing may simply not be an option. For information on valuations, financing, and deal structures please see www.avondale.co.uk for our technical guide series. Or feel free to contact a member of the Avondale team at +44 (0)1737 240888, our Contact Us page or email av@avondale.co.uk for further information.
