Companies get acquired everyday. Sometimes, competitors do it to dominate a market, expand their portfolio or simply remove a cumbersome player. Sometimes, financial buyers do it because they identified areas of improvement, growth opportunities, or simply a sustainable business model that they like. Other times, opportunity simply knocks on the door at the right time.
Sometimes, a shareholder wants to buy-out her/his counterparts while, on other occasions, shareholders are looking for external sources of capital to fund growth, mitigate their own risks or a slew of other reasons. Sometimes, a shareholder wants to focus on other things, bank on the company’s success or, simply, retire. Other times, the shareholders don’t even want to sell but are forced to do so.
Sometimes mergers, acquisitions or divestitures are simple, oftentimes not so much. Sometimes the reasons behind it are clear, other times not so much. Sometimes, things work out for the best, other times, not so much. Sometimes, both sides are willingly entering into a transaction, other times, no so much.
In short, every deal is unique because every transaction has its own story, actors and reasons, on both sides of the table. For that reason, assuming that one has become expert in M&A because he or she has gone through a few of such processes is – generally – assuming wrong… and, usually, such assumption dramatically increases the odds of failure.
Now, don’t get me wrong, I am saying that going through a M&A process requires a PhD or understanding quantum physics. In fact, Mergers and Acquisitions processes, assuming they are somewhat structured, do tend to fall in the same general outline and typically have the same major milestones… but remember, the devil is in the details. That’s why, assuming all processes will be the same is the key to an assured failure.
Not all companies are good acquisition candidates
Some companies are better left untouched, be it that they are truly successful as a result of their independence or, on the contrary, that they are so unstable that the mere fact of looking at them generates liabilities.
Some companies – although successful at one point – have no or very limited future as new incumbents make them outdated or even obsolete. This is a recurring theme extremely visible in the tech arena but by no means is it limited to this sector.
Other companies could become good acquisition candidates but are just not there yet. Others were good acquisition targets but became too large or too messy for a buyer to justify itself writing a check that size. In the Pet Food sector, Blue Buffalo was a good example of the latter. The company has an amazing product but was, ultimately a ‘one-trick poney’ so large that the only logical exit was going public.
Not all companies are organized properly to successfully take over others
This is mostly true for mid-market companies. Acquiring another company is not the hard part here, successfully integrating it in your organization and reaping the benefits of this move is.
Too often, management teams of mid-size companies get presented with opportunities to acquire another business. It’s a great way to grow and oftentimes opens the door to new markets, etc. So, when presented an opportunity that seems to make sense, they run for it (as they oftentimes should). Only problem is that sometimes, the “what do we do with it” questions only come in after the fact, or once the process is extremely advanced and about to close.
How much overlap is there between the 2 operations? Who will manage this new unit? Will both operations run separately or do we merge them into one group? How similar are HR policies and benefits? Who are the key employees of the acquired business and how do they fit with own culture? (if you’ve been reading others posts here, you’ll notice that corporate culture is a recurrent theme here, that’s because this often misjudged intangible asset oftentimes turns out to be a liability if not well accounted for and can even rush things into utter failure when handled poorly…).
The Bottom Line? Planning is everything
My best advice: Know what you want, and why you want it. Define clearly your objectives and remember them as you advance in the process.
For example, as a Seller, if you care more about the legacy or well-being of your employees than about maximizing your exit, then you’ll want to focus more on the qualitative aspects of your bidders than solely on the term sheets they’ll send. Is divesting of this asset an opportunity or a need? Would you be open to retain some ownership instead of selling a 100%? If so, on what condition? Should you have relatives involved in the business, how might they be impacted by such a deal? How do you feel about it? Do you already have a price in mind and, if so, where does it come from? Is it rational?
In the case of a corporate divestiture of a division, how easily can the division be separated from the rest? How are the shared expenses accounted for? How will removing this division impact your P&L? etc. Remember that, for large and complex organizations, oftentimes a each division has a value beyond the incremental income it generates for the group. Sometimes, a seemingly non-performing asset allows for better utilization of the ressources or absorbs its fair share of centralized expenses in a way that it is more advantageous to continue operating it than it would be to divest of it.
The same goes on the buy side, are you looking for a bargain or do you prefer to buy an outstanding business with great potential, even if that means you may have to pay some premium for it? Is your investment approach to buy and hold or to buy with the intent to sell some years later? If this is an opportunistic buy, will this opportunity still be available down the road should you decide to pass on it now?
Are you buying this company to strengthen yours? to diversify? to gain access to that audience you just can’t reach by yourself? to give something to do to your kids? Do you intend to take an active role or do you see it as a passive investment? Is this a company that your subsequent generations could inherit and continue to grow? Does this company provide a platform onto which you can add more lines or concepts down the road? Or, alternatively, how can this company benefit from our existing platform to further grow or improve its margins?
These are only a few of the many questions one should ask – and answer – before actively entering into such a process in order to improve the odds of conducting a successful transaction!