Since 2000 growth by acquisition has experienced a dramatic rise in popularity. Widely viewed as the 6th and possibly 7th merger wave (Thomson Reuters) since the early 1900s the current M&A market is experiencing record deal activity, dollar volume and valuation multiples. For a business with a balance sheet that supports growth by acquisition there are several considerations to be made before sourcing and evaluating deals. With a majority of acquisitions in the marketplace failing to produce the acquirer’s expected synergies, it’s imperative for a firm to develop a clear acquisition strategy before sourcing deals.
Apart from boosting revenue, there are a number of reasons a firm may pursue an M&A transaction. Some of the more commonly cited justifications include: revenue and cost synergies, access to new markets, removing excess capacity, accessing management talent, acquiring IP or technology, improving trade performance or possibly as a defensive move against competition. Whichever the justifications are, they need to be laid out long before the deal sourcing begins. Once a target is identified, emotions start to run hot and resources burn while analyzing the offering. Furthermore, the M&A marketplace is a small world and reputations can be badly tarnished if a company is labeled as a tire kicker or window shopper. So be sure the objectives and target profile are clearly identified and agreed upon by management and shareholders before entering negotiations.
Once the objectives are established the company needs to decide how to best accomplish them. Diversification horizontally or vertically, increasing share in existing markets, penetrating new markets, lowering production costs by economies of scale or accessing new sales networks are some of the benefits of an acquisition. The critical question is whether a company is better off growing organically or by acquisition? Ideally, a diversified strategic growth plan would include a combination of both. Acquisition isn’t a growth strategy in itself. Rather, it is one of several techniques available to expand market share and enhance capabilities. With a strategic plan that incorporates both a firm can grow methodically by geometric accretion. It’s worth noting here that organizations exhibiting scale tend to fetch a higher valuation in today’s M&A marketplace. They also have access to a higher volume pool of buyers that likely contains companies seeking acquisitions in possession of impressive war chests. Consequently, a firm that has plans to go to market in the near future may consider acquiring smaller targets with that meet solid profiles in anticipation of a boosting valuation upon exit.
Strategic planning must be adaptable and will invariably make assumptions of future company earnings and performance. An investment in organic growth can pay off big at the time of an exit, if it’s time appropriately. At the same time, acquisitions can accelerate higher numbers on a company’s income statement and bring higher valuations at exit. Establishing concrete goals for growth and developing a plan that includes both organic and acquisition growth strategies creates a solid framework for management to operate within and can prevent shareholder inquiries. Lastly, it’s important to remember that if a company is a buyer today, it will still need a firm exit strategy because some day it will be a seller. That day might come sooner than planned and failing to plan for the future can be an expensive mistake.
