No matter current business conditions, M&A can accelerate your growth into new market segments and geographies, allow you to sell new products and services, and give you quick access to new talent, technology, and customers. In short, acquisitions can help you take your business to the next level.
In this series, Harris Williams shares some of its key insights on managing the complexities of M&A. This first installment discusses five foundational themes to consider before getting started. Parts two and three will provide concrete guidance on the acquisition process itself and on maximizing value after the acquisition is complete.
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In times of both economic challenge and prosperity, leading companies keep growth top of mind. How will they increase scale, expand offerings and capabilities, or reach a broader customer base? And, how much growth can be achieved organically versus through acquisitions?
“In any economic climate, acquisitions can enable companies to enhance market share, capitalize on market opportunities, and increase scale,” says John Neuner, a managing director at Harris Williams and the firm’s co-head of M&A. “In times of economic uncertainty, acquisitions can also reduce risk by providing customer, geography, or product diversification. Given the current environment, now could be an opportune time to accelerate or initiate an acquisition strategy, particularly where sellers may not have been willing to entertain conversations previously.”
"In times of economic uncertainty, acquisitions can also reduce risk by providing customer, geography, or product diversification."
— John Neuner, Managing Director and Co-Head of M&A
But, for first-time acquirers, an acquisition can seem daunting and risky. With no experience to lean on, most private companies don’t have a good understanding of all that’s involved and, more important, what’s absolutely necessary for a deal to be successful.
Because of this, we’ve put together this primer on the five foundational keys to deal success. These are critical concepts every first-time buyer should carefully consider before starting down the acquisition path. Doing so can mean the difference between a transaction that achieves its intended objectives and one that fails to live up to expectations, or worse.
1. Clear Vision and Strategy
“In our experience, the biggest key to success is the most fundamental: having a clear vision and knowing the role the broader enterprise strategy plays in defining the organization’s acquisition strategy,” says Bill Watkins, a managing director at Harris Williams. “It’s critical for owners who want to pursue acquisitions to fully understand what they want to buy and why. What’s the purpose of the acquisition? Is it to build scale? Is it to add new product lines or service capabilities? What do they want their company to look like after the acquisition or multiple acquisitions? The reason for an acquisition should be clear, otherwise there could be internal conflict as employees struggle with supporting and implementing the strategy.”
Importantly, clear communications and messaging must accompany the vision and strategy. This includes what they’re telling those outside the company—investment bankers, the media, brokers, private equity firms, lending institutions, and targets in general. These entities need to know why the company is looking to buy and what makes it a good buyer. It also includes internal stakeholders—division heads, the executive management team, all the way down to sales leaders, group heads, and operational leaders. All of these people not only need to hear a consistent message so they’re on the same page as the acquisition kicks into gear, but also understand and contribute to the development of said message.
“The fact is, all acquisitions aren’t the same,” notes Larissa Rozycki, a director at Harris Williams. “They can vary in the incremental value they add, the time they take to plan and execute, and the work required. The more time shareholders and company leadership can spend up front developing a sound M&A playbook, the more successful the acquisition will be.”
2. Basic Acquisition Competencies
Serial acquirers are well-oiled machines within the world of M&A. They have a formal, largely automated acquisition procedure built on years of experience. They have the right knowledge and behaviors in place, not only at the top level but also down to the group, business unit, and functional heads. Acquisitions are simply ingrained in their DNA and their culture, often because of the collaborative nature of acquisitions: Key personnel are expected to have a voice in the process, and that voice has influence.
“First-time or even opportunistic acquirers understandably may not have the resources and capabilities in place to make acquisitions a core competency,” observes Virgil Jules, a director at Harris Williams. “That’s why it’s important for business owners to align themselves with experienced external advisors—such as accounting firms and outside legal counsel—who can provide valuable guidance and advice.” Jules adds that it’s also important to have appropriate lending relationships in place so that financing can be responsive and streamlined when needed.
Arguably the most critical competency is the internal deal team who will drive and manage the end-to-end acquisition. Not only is this team tasked with a significant portion of due diligence, it will also be responsible for post-deal integration. “It’s vital that employees with integration duties also have important roles during the acquisition,” says Watkins. “That can help ensure the entire deal team is in lockstep to mitigate potential integration pitfalls. Prospective sellers want to understand early on who in the organization will be part of the core acquisition team, what they bring to the table, and where there are experience and expertise gaps.”
Some companies may not have a formal business development staff or think they can’t afford to dedicate executives to a pursuit. But to have an effective M&A strategy, a company will need its key personnel to understand they’ll have to stretch outside of their normal day-to-day responsibilities and provide some additional capacity for M&A efforts. That said, many owners in this position often consider turning to a third party to handle most or all of the acquisition activities to reduce the burden on their employees. Importantly, any external buy-side M&A advisors should have deep experience and extensive contacts in the space the acquirer is targeting.
But to have an effective M&A strategy, a company will need its key personnel to understand they’ll have to stretch outside of their normal day-to-day responsibilities and provide some additional capacity for M&A efforts.
Other companies may have a formal group of dedicated business development resources who, because they’re out in the market every day, have a good handle on which companies (including competitors) are attractive and good acquisition candidates. They’re also adept at interacting with the people at prospective targets and getting to know their culture and business. For these companies, a hybrid model that includes a mix of internal and external resources generally makes sense.
3. Targeted List of Prospective Acquisitions
“It’s a big world out there, and there are plenty of potential targets for a company looking to acquire,” says Rozycki. “It’s critical to have a targeted list of prospective acquisitions that make sense given the company’s organic growth strategy. When developing this list, owners should make sure to avoid making it too narrow, which can result in missing out on promising opportunities, or too broad, which leads to scarce resources chasing too many targets.”
How to create this pool of targets? Leveraging key personnel within the organization is critical. Pushing the management team on the “who” is one thing, but having them contribute to the “why” can be just as important. Doing so also helps the team to develop an acquisitive mindset and critical buy-in early on.
Engaging outside advisors also can be helpful. So can attending trade shows and communicating with sales reps or field teams to understand the competitive landscape or other companies that could provide complementary growth. The more owners keep their eyes and ears open, the more they might realize that they’ve been building an acquisition pipeline all along.
4. Preemptive, Proactive Negotiation
Just as it’s often better to purchase a home directly from a seller before he or she has listed it with a realtor, it’s generally in business owners’ best interests to pursue “preemptive negotiations” with potential targets. The rationale is simple, says Jules: “The odds of being successful are infinitely higher if an acquirer isn’t competing against 20 or 30 others looking to buy the same asset.”
Furthermore, he says, privately held businesses typically aren’t as well-known as public companies or private equity firms active in the sector. They lack the name recognition and the reputation as a buyer of choice in the marketplace. If private companies simply sat back and waited for those looking to sell to contact them, or banks to call with interesting opportunities, it’s highly likely they would find their deal cupboard bare.
As such, buyers benefit from a strong, aggressive outbound effort to fill their target pipeline. They should establish a direct line of communication with promising targets, building rapport early and fostering it over months or years so that when a target is ready to sell, acquirers are in a prime position to buy. And, they’re more likely to preempt a broad transaction that will require a lot of time, money, and resource investment to participate in, and that carries the risk they still may ultimately fall short of closing the deal. That same type of outreach should be directed beyond targets to investment bankers, brokers, various networking organizations, and other entities that could serve as valuable marketing tools to help spread the word about a company’s intentions and aspirations.
“If you do find yourself in a competitive situation, be as responsive and communicative as you can,” advises Watkins. “Be direct with the company and its investment banker if the company is a ‘must-have’ asset, and show conviction by your behavior throughout the stages of the sale.” For example, he says, be as specific as possible about the amount of remaining diligence, and provide a clear path forward in getting to close. Personal touches when pursuing an asset, such as a handwritten note along with a bid letter, spending more personal time with management, or even one-off communications to express the desire to work as a team, can go a long way toward differentiating buyers. “Even the little things, like promptly returning a confidentiality agreement, can make a big difference,” notes Rozycki.
5. Purchase Price Considerations
Finally, it’s understandable for buyers to be financially prudent. However, says Jules, acquirers shouldn’t be afraid to perhaps go beyond what they ordinarily would be comfortable paying to capture the perfect acquisition target. “What if it’s an asset that would be a critical addition to the business? Especially in competitive situations, buyers should weigh the possibility that a target could be acquired by another competitor—which carries a significant opportunity cost for the losing bidders.”
Thus, buyers shouldn’t shy away from getting aggressive when the situation is right. By the same token, buyers also need to be disciplined, and shouldn’t spend their hard-earned money on assets simply for the sake of making an acquisition.
“For companies considering their first acquisition, it’s an exciting time, but it also can be nerve-wracking because they’re wading into uncharted territory,” notes Bob Baltimore, a managing director and the firm’s co-head of M&A. “That’s why first-time acquirers need to understand up front what’s required for success, and how to augment their own capabilities with valuable external guidance and expertise.”
"First-time acquirers need to understand up front what’s required for success, and how to augment their own capabilities with valuable external guidance and expertise."
— Bob Baltimore, Managing Director and Co-Head of M&A
More than likely, the initial deal won’t go perfectly. But if there are more acquisitions in its future, a company needs to make sure it learns from the bumps and incorporates those lessons into its playbook for the next pursuit. Having such a playbook to draw on enables companies to take full advantage of acquisition opportunities in times of uncertainty and times of prosperity.
In subsequent articles, we will dive into the specifics of each stage of acquisition and integration, highlighting proven ways to unlock the full potential of your company’s M&A-powered growth strategy.