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Acquisition Strategies

Accelerating growth
Method Advisory Insight #2

Insight #2

Acquisition Strategies
Take Aways 1. Acquisitions should form part of a companys overall strategy 2. Poor evaluation and integration planning lead to the greatest risk of failure in acquisition activities 3. Companies make acquisitions for two reasons: acquiring resources or business models

Introduction
The growth of most businesses can often be limited by internal and external factors over which the business may have little control. Organic growth via increasing overall customer base, increased prot margin per customer, new sales or market segments can be incredibly difcult to achieve. Most private businesses never grow beyond a small number (<20) of employees. Market forces can play an important role in preventing growth, but even companies with exceptional products or services can still struggle to achieve consistent growth due to their own capacity and capability to grow. For many of these companies, developing and executing an acquisition strategy can provide the business with a growth catalyst and signicantly improve its effectiveness and protability. If undertaken as part of an overall growth strategy, they can ll gaps in product roadmaps, open up access to new and adjacent markets, access technologies and skills to facilitate growth and, of course, improve the nancial position of the business via revenue generation or cost reduction.

Developing an Acquisition Strategy


Many entrepreneurs dismiss the potential of acquisitions because they lack experience in M&A and believe that we are not big enough to undertake an acquisition. We believe that acquisitions can play an important role in companies of all sizes so long as they consider acquisitions as part of their regular growth and strategic planning process and regularly review whether an acquisition makes sense to achieve specic goals. With this approach, an entrepreneur can build a highly successful acquisition strategy by following a logical plan, that acknowledges areas where they may lack experience, and ensures any potential acquisition opportunity ts within existing growth criteria. The plan would typically have the following elements:
Develop Evaluation & Purchase Process

(measured by headcount or revenue), its likely that this will be the largest investment the company ever undertakes. A companys management team should access the wide range of information available on the subject and take advantage of the education and insight that can be provided by professional advisors. Most acquisitions will require the services of an accountant, lawyer and possibly additional services from an investment bank, corporate advisor and nancial planner. Select advisors that include transaction work as part of their core competencies. Also, make use of industry mentoring programs, such as The Executive Connection or Entrepreneurs Organization to reach out to other business managers and owners that have signicant acquisition experience. Build Expertise Build expertise and develop strategic relationships with others which will bring experience into the process. The management team should conduct their own skills audit to determine what acquisition skills/capabilities already exist in-house. The acquisition process will involve tasks such as strategic planning, gap analysis, market/trend analysis, nancial modelling, identifying potential target companies, building relationships with potential target companies, managing due diligence, negotiating, postmerger integration and project management skills.
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Education

Build Expertise

Develop Growth Strategy

Identify Acquisition Targets

Develop Integration Plan

Implement Review Process

Education Acquire knowledge about the acquisition process. As most acquisitions are between 15-50% of a current company size

If an external M&A consultant is required, they should have specic knowledge of your industry and experience in transactions relevant to the size of your company and the target rm. If there is a signicant amount of post-merger integration work to be performed, it is wise to have that person employed full-time within your management team. It is common to underestimate the amount of time (and money!) spent on preparing for an acquisition, which may not even be successful. Once you have in principle agreement with your target, the time commitment will also increase substantially. For this reason, it it makes sense to bring additional capacity onboard to assist with the transaction as your existing management team will be unable to carry out their day-to-day duties and commit the time necessary to an acquisition. Develop Your Growth Strategy The starting point for any acquisition must be to focus on the overall growth strategy of the business. Without taking the time to develop a growth strategy, an acquisition is nothing more than an opportunistic purchase - which isnt a strategy - its growth by luck and hope. The Ansoff Matrix shows four ways that businesses can grow, and helps people focus on the risks and tasks associated with each alternative.

It provides a quick and simple way of thinking about growth.


Ansoff Matrix

Market Development Markets & Customers


(sales to new markets of existing products and services)

Diversification
(sales to new markets of new products and services)

New

Existing

Market Penetration
(sales to existing markets of existing products and services)

Product Development
(sales to existing markets of new products and services)

Products & Services Existing New

Market Penetration A market penetration marketing strategy is very much about business as usual. The business is focusing on markets and products it knows well. It is likely to have good information on competitors and on customer needs. It is unlikely, therefore, that this strategy will require acquisitions to fuel growth.

Market Development The product remains the same, but it is marketed to a new audience. Exporting the product or marketing it in a new region, for example, may require accessing new distribution channels which could warrant an acquisition strategy. Product Development The business aims to introduce new products into existing markets. This strategy may require the development of new competencies and requires the business to develop modied products which can appeal to existing markets. This approach may warrant acquiring external skills, capacity or technologies to accelerate the product development process. Diversication The business markets completely new products to new customers. There are two types of diversication, related and unrelated diversication. Related diversication means that the business remains in a market or industry with which it is familiar. This is an inherently more risky strategy because the business is moving into markets in which it has little or no experience. This may be a strong candidate for using an acquisition to achieve diversication.

With each of these growth options, the company has a choice to pursue the option organically or accelerate the growth strategy through an acquisition. Identify Acquisition Targets Acquisition selection criteria should be established that enable the business to achieve its growth strategy. Criteria may include geography, product and market characteristics, company culture, protability or unique access to skills, capabilities or intellectual property. Once the selection criteria have been established, a list of potential targets can be developed and prioritized. Evaluation When acquisitions fail, it is generally caused by the acquiring company failing to objectively and systematically work through an evaluation framework. In many cases the acquirer does not know (or loses sight of) what they are buying. At a minimum, the evaluation process should question: How committed is the seller? Exactly what is the benet expected from the acquisition? Will the acquisition be integrate into our existing business or maintained separately?
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Are valuation and deal terms likely to be agreed? Can we verify key information and articulate the inherent risks with this acquisition? What timescale and activities will be required for postacquisition integration Develop An Integration Plan Once the acquisition gets the green light an integration plan should be executed that protects existing customer relationships and revenue and communicates the changes to staff, customers, suppliers and partners. Implement a Review Process A review of the acquisition is an important step in building corporate know-how, rening acquisition and growth strategies and improving the probability of success for future transactions. How Can Method Advisory Help?

should target or what the potential synergies would be from an acquisition. We use a very discrete (and sometimes anonymous) approach to identifying and evaluating potential targets. The total time required to run an acquisition process varies greatly, but the following is indicative:
Action Establish strategic rationale for acquisition Establish acquisition criteria Research and map prospective targets Validate target list Initial approach to targets Initial meeting with targets Qualify targets Weeks 2 4 5 5 9 12 12 14+ 16+ 16+ Parties Joint Joint Method Advisory Method Advisory Method Advisory Method Advisory Joint Joint Joint Joint

Method Advisory specialises in providing transaction assistance to mid market technology companies. We can assist with growth strategy, acquisition selection criteria, target identication and deal negotiation. Typically, our engagements are when our client knows they have a growth/capability gap, are not sure about who they

Issue offer Negotiate offer Complete acquisition

If you would like to discuss your acquisition strategy, we would love to hear from you. You can reach us by emailing info@methodadvisory.com or visiting www.methodadvisory.com for more information.

Method Advisory Pty Ltd 2013


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