A few years ago the pork industry coined “The Other White Meat” to sell more pork.
One could term growth by acquisition “the other white meat” of corporate growth when compared to the “chicken” that is internal, organic growth. Now is a great time for companies with strong performance and balance sheets to grow not just
organically but through acquisition. With the marketplace divided between strong performers who weathered the downturn well and those who didn’t, it is a perfect time for the strong to absorb the weak, with both benefitting from the arrangement.
Companies make acquisitions for a host of reasons including:
Economies of scale: Cutting away your target’s infrastructure while keeping the revenue-generating portion of the business can yield significant increases in profits.
Absorb a competitor: This reduces competition in the marketplace, allowing for higher gross margins and bigger market share.
Add new markets: Easier than internal expansion and often faster.
Rationalizing a vertical supply chain: By absorbing other levels of their supply chain, companies can retain more of the chain’s profit under one roof.
Horizontal growth through “near strategics:” Is there a company out there that always sells to the same client as your company with non-competing products? They could be a perfect target as you can cut away overhead and leverage a single sales force to reach the same market both companies are serving.
Synergies: Perhaps a company has products or services that complement or are even necessary for use with your firm’s products or services. Under one roof, the integration of those products or services could be taken to a higher level.
Arbitrage Strategy: Consider the “magic of multiples.” As a general rule of thumb, the larger the company, the higher the multiple of its earnings it will sell for. The firm with $50M in sales and $7M in earnings might sell for seven times those earnings. That same firm can grow through a handful of smaller, lower-priced acquisitions bought for four times earnings, then as a $100M company with a $15M to $20M in earnings, it might now command a 10 times multiple of those earnings in the marketplace. Bottom line: initial valuation was approximately $70M comprised of the “platform” company and the “add ons” it would eventually snap up. As a consolidated company it would later command a valuation in the $150M to $200M realm depending on earnings.
Though an acquisition can seem like the answer to growth challenges, there are issues to take into account:
- Making an acquisition can be extremely time consuming for the both the acquirer and the target company. It’s critical that companies plan for the additional effort needed to work through the search, negotiation and due diligence phases of the deal.
- Ensure that you have the right talent sets represented in the company to manage the process, or have a plan to retain qualified consultants to fill the gaps.
- Ensure that your professional advisors are lined up prior to starting the search. While a Mergers & Acquisitions Intermediary is an excellent starting point, the company should also have the right bankers, accountants and attorneys ready to go, experienced in M&A transactions.
- The current lending environment is challenging, however, strong combined cash flows (acquirer and target) and a direct-industry match lessens the risk for both you and the lender. Having weathered the downturn well and emerged with a strong balance sheet, your company may be one of the few compelling cases for a lender today.
- Recent research has shown that over the last decade, 70 percent of the completed mergers and acquisitions were later considered to have failed to achieve all the desired goals. Having realistic goals is a start, but companies must also know themselves; strengths, weaknesses, and outside perceptions.
The opportunity to grow by acquisition has never been more attractive in recent years than right now. Will you seize the day and make a savvy addition to your company, or will you miss the opportunity only to face a newly energized competitor whose own recent deal puts them in a commanding position in the marketplace?
Leon D. Garber, CBI is the President of Gaither, Garber & Associates, Inc., and is a Certified Business Intermediary specializing in crafting and executing mergers, acquisitions and exit strategies for business owners. He can be reached at 615-7154 or e-mail leon (at) gaithergarber (dot) com.
