GROWTH STRATEGY

1. Introduction

Companies that choose mergers and acquisitions do so because of the following reasons: broadening product lines, increasing market share and financial position, betterment of intellectual capital.

A lot of mergers and acquisitions fail as opposed to those that succeed and the reasons are: bad implementation of post merger integration, acquirer has a weak or no core business, target larger than the acquirer, inadequate due diligence, ROI not justified by the premium, poor technological fit, different corporate cultures.

Developing a corporate strategy that includes a mergers and acquisition strategy and simultaneously developing a sound understanding of your business needs along with the concerned market is normally a good way to vet the requirement of mergers and acquisitions as opposed to other strategic planning for growth.

Once these steps have been performed the next step would be the process of identifying potential targets and screening them. Knowing your target helps in the transactional phases as it allows you to have a better understanding of their business planning and gives you a better insight to secure a win win negotiation.

The actual transaction itself could be done with the help of outside advisors; law firms, investment banks as they have considerable experience in conducting due diligences to evaluate and valuate the SWOT of your target company after the identification and initial screening of potential targets.

The last phase is the most important phase of any M&A transaction; the post merger integration phase. This phase should be planned in advance and should be followed according to a timeline to allow for smooth integration of the three p´s (product, people, profits) into your business processes.

2. Business Plan

As you all know the process of operating a successful company is your business plan. It includes all your processes, your ideas, strategies for growth and contingencies. This plan should be always kept up to date and free from gathering dust. Low risk strategies should be evaluated in case they are better than following a strategy of growth through mergers and acquisitions. These other alternatives include: joint ventures, franchising, licensing and sales and distribution agreements.

Business plans are management’s best friends as it allows them to check when in doubt and to grow in a structured manner. The business plan helps to set the objectives of the company and set bench marks for the company’s performance to measure against.

A business plan should cover the following key issues:

1. Company description - mission, history, "USP", approach to selling its products and services, its value proposition to its customers and how it intends to achieves this. To project the future one must know the present and the past. Weak core businesses should be addressed by management prior to making acquisitions.
2. Management and organization - members of the board and their backgrounds and the required skill set that might be needed in the organization, what is the value of the intellectual capital and whether it can be transferred should also be mentioned. Acquisitions sometimes transfer the talent that businesses require to grow.
3. Marketing and sales - marketing and sales plan to include distribution, channels, pricing strategies (USD= EUR) partners based on the proposed value of your products and services. Acquisition of a company with a similar products and a strong market brand or sales plan can suitable increase your market sales.
4. Market and competitors - describe in great details the market current and future for your products and services, an appraisal of the industry and its SWOT analysis, along with key industry trends. Competitors and their products historically and present should be analyzed to see if their is any historical data for key technological changes.
5. Products and services - features, processes, production, components, and uniqueness should be addressed in detail. Focus on research and development, production needs, distribution channels. Product costs and availability of material including operational forecasts should be prepared as well. Acquisitions normally provide the missing component to better businesses, markets, products or technology.
6. Financials - Estimate your cash flow requirement, working capital, capital investment requirement, break even ratios, and time to profitability as a stand alone entity. Financial forecasts help you understand whether you have the capability to handle acquisitions.
Alternatives to M&A- build internally, form joint ventures, form strategic partnerships, enter into licensing agreements, franchising.

DEVELOPING M&A STRATEGY Once you have decided on your growth strategy and your decision includes growth through M&A as it is an appropiate strategy and has well formed and founded grounds then the next step is the search for the acquisition canidates that fit your company profile.

1. Introduction

Before beginning any search process you should set up the guidelines for the search which should include: financial objectives, identification of industry and markets, companies that fit with the preliminary planning included in your business plan. Develop screening criteria for evaluation of target companies that include an information database that can either be obtained through in-house research or through consultancy companies that specialize in such services, listing of companies based on their enterprise value, revenue and cash flows within your acquisition criteria. Further source of information’s include industry trade journals, newspapers, websites, annual reports and my favorite CNBC provide sufficient information to start a preliminary screening process.

Questions that you should answer in your screening process include:

How will the space consolidate? Who will enter the space? What acquisition strategy will maximize your market position? How can you build a “war chest” for acquiring complementary companies that include technologies and services? How can you broaden your services platform?
2. Financial Objectives

Acquisitions take time to fulfill and its important to be certain that your acquisition will be successful. Financial objectives are based on deal size and the financial risks involved. Deals can be too large creating problems in the post merger integration stages or too small where there is a financial risk for not getting a significant return on your investments.

Create an acquisition budget where the following factors should be taken into consideration:

1. Management teams experience in post merger integration issue: turn around experience, funding and skills to manage effectively a consolidated company, comfort in mangement of a large portfolio of companies.
2. Risk allocation: risk averse or high risk takers, reasons to take over to create a high return or steady returns over a period of time.
3. Affordability: Debt, equity or a mixture to finance the transaction, in case of debt to know what is your borrowing capability before being forced to complete a transaction not because of the transaction value but because of your debt build up. Equity, likewise is not unlimited. Investors that have equity interests are clearly concerned about ownership dilution and financial measures like ROI, effect on cash flows and EPS.
Financial screening varies from industry to industry, market to market (premiums and discounts that may be available should be taken into consideration). Financial projections are very important measures to be certain that in the case of debt financing the ability to meet the debt requirements are fulfilled. Issues that revolve under debt financing like restrictions on taking on new debt or limits on equity used on financing should be considered earlier on as it might restrict future investments.

3. Screening Criteria

Based on your screening criteria you will have an overall picture of the potential target companies even thought, seldom, a company is found that fits all your criteria. The screening process allows you to choose the most important business based on your composed criteria’s for best business.
Looking at industries where you have business experience or looking at new industries where you can contribute to grow the new business with your business experience should be the starting point of the screening process.

Important issues are:

1. Understanding the target industry: knowing its "USP" to overcome paying a premium in case of a shake out where similar companies are up for sale.
2. Match your characteristics and experience with the target industry: comparison of SWOT to see where you can compliment each other business.
3. Minimum and maximum price for Target Company: use of options to increase your ownership interests, not waste your time on targets that are after careful study beyond your budget. What are your financing objectives and how you intend to carry out the financing?
4. Revisiting your marketing criteria: market share, potential customer base, type of new customers, and integration of your marketing and sales strategy, brand name investment, reputation, and distribution channels of the target company.
5. Revisiting management criteria: what is the role of the acquired company’s management, compatibility of managers in target and your company, skill level and corporate culture comparison?
4. Finding Candidates

Identify how you would like to implement your screening criteria; using in-house personnel who play a very important role or by using external advisors like investment bankers, business brokers, lawyers, accountants, specialized consultants.
In case M&A plays an important role in your growth strategy then usually companies have an in-house M&A department that usually know the company and its strategy and how acquisitions can be integrated successfully. These professional should do deals because it is the right deal and brings value to the company and can coordinate work and work well with external advisors.

External advisors on the other hand are professionals who know the markets and normally bring a lot of insight into M&A transactions as they are not dedicated to deal flow ex. lawyers and consultants help in structuring, legal, tax and specialized advice.

Investment bankers and business brokers are normally concerned with deal size and usually help in creating deals by buying and selling businesses for a fee. These companies also include a fee structure that cover screening targets, evaluating targets, preparing financial information, pricing the deal and even sometimes helping in the negotiations. These intermediaries are an important source for growth of the M&A markets as many business owners who consider selling their business use them to facilitate the transaction.

Deal size usually is the most important criteria in searching for a potential candidate as it normally takes a while to find the strategic fit, according to your business needs, that is fairly priced.

Who are the business owners of companies that you are interested in? Look at their financial: past and present. High debt or low working capital could mean that they are interesting in selling to avoid future trouble or highly profitable company with lots of cash could be interested in selling to get cash out of the business. Look at the companies management history it could give you invaluable information regarding the status of the business ownership. Compile a list with all your information and start refining it and refreshing it with new information regarding potential business targets. Include companies where there is a possibility to acquire and mark those out that are not interested in current acquisition; keep them all on your radar.

NEXT WEEK: Evaluation of candidates for acquisitions part 1- 16.02.04