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Gun Shy on M&A? 10 Reasons to Get Trigger-Happy

“Gun Shy on M&A? 10 Reasons to Get Trigger-Happy”

Ignore the potential of acquisitions, and you ignore a vital, strategic vehicle.

In the past five years we’ve seen it all — "roll-ups" (rapid-fire industry consolidations), "poof-IPOs" (companies that merge and go public on the same day) and corporate gigamergers (bigger than the mega ones of the ’80s). Recently much of this has come to an unhappy ending. Indeed, it’s enough to make one steer clear of acquisitions — but that would be a mistake. Mergers and acquisitions might make sense for your company because they can help you:

1. Achieve your goals faster. Your growth strategy should push the balance between risk tolerance and speed of execution, particularly when there is a first-mover advantage.

Sanitors Inc., a commercial janitorial and landscaping company in San Antonio, has grown from $30 million in annual sales in 1998 to more than $140 million by keeping one eye on operations and the other on new deals. "We could never have achieved those numbers without clearly defined acquisition criteria," says CEO Darrell Glover.

2. Obtain a competitive advantage. By acquiring a rival, you can obtain its strengths (which may include defensible intellectual properties such as utility patents, design patents, copyrights, trademarks or trade secrets). You may be able to build a new brand and develop technologies that don’t infringe on your own or "buy" share by pricing aggressively.

3. Neutralize a competitor. Some competitors offer little substance to acquire. But their rogue or fiercely competitive actions may be harming your company’s growth, market share and profits to such a degree that they could be worth the price of acquisition: You could assimilate them, redirect their line of fire or liquidate.

Be wary of cultures that may be tricky to integrate. For example, encouraging employees (both yours and theirs) to focus on a new common enemy may take longer than expected. Also be sure that company principals are contractually barred from starting up again, an event that would counteract the merit of your acquisition. If liquidation is your aim, be realistic about expected proceeds; they may be only pennies on the dollar.

4. Enter an attractive market. If you want to enter a hot new market, acquiring existing players buys speed to market through in-place plant(s) and equipment, product or service lines, established management teams, customer relationships, market knowledge and market share.

Your first customer may be the hardest one to win, says Glynn Willett, CEO of ATX Inc. in Caribou, Maine, a $10 million company that provides software to tax professionals: "In founding our company, we completed a couple of very small acquisitions. That gave us an immediate customer base and cash flow, allowed us to offer references and focused our energies by providing a going concern to build upon." ATX is now entering a new sector — outsourced sales and use-tax-compliance services — and is using the same acquisition technique to gain customers and execute faster.

5. Enhance your acquisition’s value. Some of the more common ways include: improving products, applying technologies, broadening distribution, unfettering growth with capital and bolstering management.

6. Prevent the competition from acquiring. Defensive acquisitions can be stressful but are useful if:

  • A competitor has partnered with an equity-capital provider.
  • A strategically important company has become too vital in your industry to ignore.

How many stops you’re willing to pull out in response to either circumstance is a function of the perceived threat vs. the cost of action or inaction).

7. Balance the rise of retailer-wholesaler power. Most retailers and wholesalers know that vendor consolidation and partnerships are a cheaper, better way to conduct business. As such, there are two reasons to acquire:

  • Create higher switching costs. These could include breadth of product or service to deliver one-stop shopping or investments in top-quality people and systems.
  • Develop new distribution channels or customers. There are few greater risks to your business than customer concentration. Strategic acquisitions can accelerate customer and channel diversification, save the business from "ownership" by its key accounts and preserve or even increase market value.

8. Enter a foreign market. An acquisition could be a sensible way to offset limits to growth in your domestic market. Warning: You must first understand the government, economy, infrastructure, currency, laws, taxes, language, culture and market of a foreign country that you wish to enter.

9. Achieve critical mass and economies of scale. Among the best ways to reduce costs are economies of scale. And among the quickest ways to gain scale are acquisitions. Companies that achieve critical mass can spread the cost of overhead and negotiate purchasing economies, shipping economies, cheaper bank financing — and a host of other savings based on buyer clout and volume.

10. Seize the moment. Occasionally a great acquisition opportunity appears unexpectedly — a good value that fits culturally and strategically. As quickly as these deals arise, they can be swept up.

"We paid $350,000 for a company a little more than a year ago and generated over $8 million in revenues from the deal," says Randy Cohen, CEO of TicketCity.com, an online ticket brokerage in Austin, Texas. The acquisition had gone belly-up by spending too much on advertising, trying to become the category killer. TicketCity moved fast and paid pennies on the dollar. "Not only did we get their phone number and Web site, but we got their client base and Yellow Page advertising they had purchased in many metro areas," says Cohen. "We inherited lots of headaches from the previous owners, but our swift action turned into something lucrative — a deal payback that was measured in months."

Every company should have a protocol for elevating these "pop-up" deals to top priority. Network with potential equity sponsors, maintain strong relations with lenders and arrange financing commitments, such as lines of credit, so these can be activated on short notice.

Tip: Create moments worth seizing. Cultivate relationships and share your deal criteria with capable acquisition intermediaries. The seeds you sow in the middle market will heighten your chances of hearing about opportunities that qualify.

Writer: Alexander G. Watson is president of Level Next Inc., a Petoskey, Mich.-based business-development adviser and acquisition intermediary. awatson@levelnextinc.com