Acquisition Acumen

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More than 50% of acquisitions are unsuccessful. This may be a daunting statistic, but not a surprising one. Acquisitions involve calculated risks to buy a better future. Mix such speculation with the "people variable," and the chemistry is bound to be unstable.

Yet you can put the odds in your favor with proactive planning.

Recruit your best minds

Gather your company's best minds for a brainstorming session; an off-site location that's free of distractions works best. Involve not only your board, but also representatives from your firm's functional areas. After all, bright ideas about acquisitions of product lines, technologies, services, markets, channels and geographies may not be immediately obvious to top brass. Encourage participants to be bold and think big.

Next filter and narrow that input by asking:

  1. What kind of acquisition makes the most strategic sense and best supports our long-term goals?

  2. What are our best opportunities in terms of:

    • Biggest impact on our company?

    • Readily available candidate companies?

    • Favorable valuations?

    • Shortest payback?

    • Ease of financing, closing and integration?

  3. Where do we expect to find our most-interested or motivated sellers?

  4. Are we able to sustain operating duties and take on the incremental duties of acquisitions?

There are many directions for acquisitions, observes Patrick Rich, VP of business development at Precision Coatings Inc. (PCI), a $27 million specialty-films business in Walled Lake, Mich. To narrow those directions, PCI has developed a market-opportunity rating model that numerically ranks each segment using criteria such as profit margins, growth and availability. "This helped us agree on the best segments to seek out deals," Rich says.

Develop an acquisition plan

The goal of this process is to identify strategies and tactics that dovetail with your company's overall strategic plan. The acquisition plan also helps bridge the gap between your core competencies and marketplace expectations.

Your plan should detail criteria such as: type of company you seek to acquire, revenues, geographic locations, growth rate, profit level, degree of intellectual property, management acumen, post-close management role, price range of what you can afford and preferred terms of the deal, such as asset vs. stock purchase or minority vs. majority ownership.

The flexibility of your criteria depends on your company's needs, the pool of acquisition candidates and the weighting of attributes, and the competitiveness among buyers. Fixed or flexible, your criteria will help you:

  • Focus your energies on the right deals.

  • Articulate your objectives to others who can help you achieve them.

  • Recognize and act on compelling acquisition candidates.

  • Stay disciplined.

Originate deals from multiple sources

Experienced buyers use both acquisition intermediaries and in-house sources to originate deals because a larger candidate pool means more opportunities.

Retaining an intermediary allows you and your executives to focus on operating duties, investing time in acquisitions only when there are qualified prospects. A good intermediary will:

  • Find and tap databases, trade journals, industry experts, associations, the Internet and other sources to build a broad candidate pool.

  • Develop an effective communications campaign.

  • Access CEOs and screen companies that fit your acquisition criteria.

  • Engender trust and motivate the appropriate companies to discuss deals.

  • Keep candidates motivated through closing and act as a friction buffer.

The goal of an intermediary is not to find the "for-sale" companies, but to open doors to the ideal ones. The best intermediaries are capable of motivating otherwise happy and independent CEOs to think about a merger or sale at a reasonable price.

You and your employees can search for additional leads by attending trade shows, monitoring trade media and making direct inquires of industry colleagues. Communicate your acquisition criteria to your employees, on your Web site and via public relations. Channel any leads to your intermediary for processing.

"We entered the specialty-polymers arena by default," says Gregory Edwards, chairman of Cass Polymers Inc., an Oklahoma City-based producer of composite materials and coatings with more than 100 employees. Cass Polymers took a small unit from a business it had acquired and developed it by attending trade shows and talking to other industry participants, as well as existing and prospective customers. "The more we listened, the more we liked," Edwards explains. "The greater our enthusiasm, the more interesting acquisition opportunities we attracted."

Networking efforts with industry contacts and M&A intermediaries positioned Cass as a "go-to buyer" for corporate orphans, family-owned companies and entrepreneurs. "Like it or not, to get deals closed, you need to have this degree of deal flow volume," says Edwards, noting that Cass now enjoys a steady stream of acquisition opportunities.

Originating deals is a methodical process requiring time, patience and persistence. Without a high level of commitment, your interest in acquiring companies will go unnoticed and unrewarded.

Writer: Alex Watson is president of Level Next Inc. , a Petoskey, Mich.-based business-development adviser and acquisition intermediary.

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