Purchasing and making the final decision whether or not to acquire a particular company may take a considerable amount of investigation and research. Different industries have varying growth rates and even within the same industry, growth rates can vary enormously.
In general, acquisitions are easier to finance than start-ups. Finance can be obtained from sources such as venture capital firms, from family funds or even from close friends.
Acquisitions can facilitate or permit rapid growth. If a company has no proprietary technology, no unique product and is not in an industry characterised by enormous growth, rapid growth can still be achieved through acquisition.
Acquisition is a method of overcoming inherent difficulties in business such as marketing problems; customers may already be well-served by a particular supplier and difficult to lure away; looking for facilities to lease can be time-consuming and building a new facility is often problematic because of limited availability.
Acquisition can also encourage rapid geographic expansion. Because of well-established customer-supplier relationships in many industries it is often difficult to extend a product line. Suppliers may be wary of supplying a competitor to their existing customers and in times of shortage only established customers may be assured of consistent supply.
Product line expansion may be difficult because customers' requirements can be hard to ascertain, and for a customer to do successful business with a new supplier a 'carrot', such as lower price, is usually necessary. Acquisition can overcome problems such as these; the acquirer can inherit the expanded product line and its benefits.
Serving the customer
Acquisition can also lead to being able to offer a more comprehensive customer service. Many customers believe it is best to be serviced by one supplier as this simplifies order entry, billing and inventory control.
The customer-supplier relationship is likely to be most successful if you can satisfy all of your customer's requirement wherever he is located and acquisitions are often a good way of obtaining facilities that will enable a company to service large accounts.
Growth through acquisition can help keep down investment costs associated with techniques such as just-in-time delivery, quality control, paperless order entry and bar-coding that seek to drive down costs to enable companies to remain competitive in local and international markets.
Sometimes a company or a division is put up for sale because it is a poor performer or no longer fits in with the strategic direction of a parent company. This can result in an opportunity to acquire a business at a reasonable price and to make a profit, provided its operations are improved. The saying "One man's meat is another man's poison" is particularly applicable in cases where one company can foresee nothing but problems yet the situation provides a growth opportunity for another.
It is not impossible
Finding an acquisition may not always be a nightmare. Even in an economic downturn there is usually funding available for an appropriate acquisition. Lenders like to see a company acquiring another business. The assets being acquired can secure loans and lenders can project interest coverage's and amortisation schedules based on past performance. In some instances the lender may even perceive that the loan is virtually risk-free. The creation of personal wealth is another great reason for acquiring companies; they can be sold on at a later stage, in some instances, at a great profit.
Corporate growth, personal wealth
The ultimate yardstick of corporate success is growth and most executives and directors will spend a great deal of effort trying to expand geographically, extend product lines and obtain greater purchasing power through greater size. Internal growth is often perceived as preferable to acquisition but this entails obtaining facilities, equipping and staffing them, learning the peculiarities of a new geographic area and securing new customers.
In short, internal growth can be a lengthy and expensive process; the acquisition of an appropriate company can achieve all of the corporate objectives of growth and personal objectives of wealth-creation.
Considerations of management
Correct management of a company will ensure success. The management of an acquiring company must therefore evaluate whether it can run the target company effectively. Considerations will therefore include similarity of 'culture' and style and whether it is a mature or relatively young business; there should also be a 'skill-fit', a common language and preferably some shared experience.
It is important to have sufficient information to be able to understand the target. Key areas to understand when assessing an acquisition include industry structure, the strategic position of the target, its quality and correct valuation. Although valuation per se is important, it is vital to ensure that an acquiring company has the necessary management skills and capacity to run the new business. Retaining key individuals with core competencies is essential in order to facilitate this.
EVALUATING TARGETS - CHECKLIST
- Financial performance relative to competitors
- Customer views
- Supplier constraints
- Operational efficiency
- Market positioning and dynamics
- Competitive positioning
- Product/technology position
- Mutual benefits
- Financing exposure
- Financial performance
- Post-acquisition plan
Identifying a Target Company
Usually there will be four stages involved in an acquisition: identification, wooing the target, execution and post-acquisition integration.
In order to identify and correctly woo the target company, key activities should be undertaken which include:
- Correct market information
- Competitive analysis
- Market knowledge
- Use of external advisers and contacts
- Analysis of potential benefits of acquisition and integration
Small and medium-sized companies usually make acquisitions in their own or closely-rated business areas. A common way of finding an acquisition is through knowing a company or an individual in the same sector.
This can mean reduced risk in that the company and its products are likely to present few surprises but it can also mean that the acquisition may be made without sufficient exploration of the alternatives available.
There are many other sources of data that are useful for identifying acquisitions targets, including:
- Auditing firms
- Business brokers
- Mergers and acquisitions consultants
- Mandate lists from merchant banks
- Management consultancies
- Trade associations
- Business Lists, i.e. Dun & Bradstreet, ICC
- Experian - Prospect Locator
- Companies House
- Industry publications
- Fairs and exhibition catalogues
- Intermediary databases
- F.T. advertisements
- Specialist publications i.e. Business Sale Report
A publication such as The Business Sale Report (Tel: 020 8875 0200) details medium to large companies for sale in the UK valued from around ￡200,000 to over ￡50m, at a cost of ￡165 a year to subscribe to. Their web site is business-sale.com . They also have a separate site for smaller businesses at bizsale.co.uk .
External advice is helpful when looking overseas for an acquisition. Companies should be able to identify overseas businesses that have useful technologies or interesting products that can be licensed for the UK market. Sometimes this approach can be a viable and less costly one than an actual acquisition.
Internal sources of acquisition opportunities may include:
- Acquisitions team list
- Individual business units
- Market research/intelligence department
- Sales force intelligence
- Customers/trade buyers
Small and medium-sized businesses can also be purchased through third parties such as company brokers, administrators, receivers or accountants. Another traditional source of acquisition is the merchant bank although the big ones tend to deal only in large transactions.
Wide range of skills
Can raise finance
Have sale mandates
Merger and acquisition consultants
Strong search capability
Have sale mandates
Do not usually help raise finance
Good industry contacts
Have sale mandates
Patchy international coverage
up to ￡5m
Sometimes success fee only