Highly acquisitive companies as well as institutional private equity funds review numerous acquisitions on a recurring basis. But only a select number of target companies are ultimately pursued. This is because acquirors must have a high degree of confidence in the ability to create and realize future incremental value as a result of the acquisition.

Many acquiring companies ultimately ascribe value to acquisition targets based upon the projected risk-adjusted returns on investment. One of the most critical elements to enhancing returns is future growth in the acquired company’s business, principally through revenue and operating profit expansion. Acquirors must be able to expand a target’s operations either organically or through additional tuck-in acquisitions in addition to realizing revenue and expense synergies on a combined basis. Creation of future incremental value and strong return on investment are important facets of the decision matrix and depend on a number of factors such as:

• Growth in revenues and profitability
• Strong barriers to entry and industry-leading core competencies
• Minimal and fragmented competition
• Minimal customer concentration
• High-quality products/services
• Product/service diversification
• Strong reputation among customers
• Talented senior management and committed employees

The aforementioned factors greatly affect the amount of acquiror interest and ultimately valuation levels. Quite often the companies that exhibit such attributes are appropriately rewarded with relatively higher valuation multiples.

If planned and executed successfully, acquisitions can accelerate growth and shareholder value for acquiring companies seeking greater market share and/or further diversification of their businesses. As an alternative to organic growth, acquisitions can immediately strengthen an acquiror’s business through potential cross-selling opportunities, revenue diversification and expense synergies. But in order to maximize the chances of success, a detailed acquisition road map, which includes strategic growth, execution and integration plans, should be developed and approved by senior leaders.

Strategic Growth Plan

Once senior management and the Board determine that an acquisition strategy is desirable, a strategic growth plan that provides direction should be developed. The acquiror’s growth intentions, targeted investment size, timing and other factors will shape the rest of the acquisition process. Addressing the following key decision points, and many others, will help provide direction during execution and integration:

• What type of growth is the company seeking (expansion or diversification of current offerings)?
• What is the targeted range of revenues to be acquired (whether in one or more acquisitions)?
• What is the maximum amount that can be invested in an acquisition strategy?
• What are the goals of the key shareholders?
• What is the overall timing and exit strategy (if applicable)?
• What types of industry trends are expected over the next five years? Will there be consolidation?
• How does the company need to be positioned competitively over the next five years?
• What types of acquisition candidates are of greatest interest?
• How are competitors growing and what types of acquisitions are they making?

Knowledge of the above areas and others provides companies with a framework around which they can execute with greater efficiency. Beyond the scope of this paper, an outside advisor should help lead this process by providing detailed analysis that (i) educates management on industry and competitive trends, (ii) identifies growth opportunities, and (iii) analyzes whether shareholder value can be created and maximized. This will provide important decision-making clarity and shape the rest of the process. Moreover, it will significantly increase the chances of a highly successful acquisition strategy.

Deal Process and Execution

Once an acquisition strategy has been established, the next step is designing the execution plan, which is highly tactical by design but requires proper planning. In general, the execution phase should yield the highest quality candidates and widest range of alternatives for acquiring companies. Execution also requires meticulous evaluation and analysis of multiple acquisition candidates, often simultaneously, iteratively and in a time-sensitive environment. Included below are some of the key areas of emphasis:

• Research, identification and prioritization of acquisition/investment candidates
• Initial contact and relationship building with prospective acquisition targets
• Information gathering, including detailed discussions with senior management of targets
• Internal strategic assessment of prospective targets and acquisition rationale
• Detailed financial modeling/valuation (standalone and combined financial projections, pro forma adjustments, synergies, integration costs, etc.)
• Transaction structuring and buyout analysis (debt/equity mix, equity ownership, exit strategy, internal returns analysis, etc.)
• Sourcing of debt and/or equity capital (as applicable), including dissemination of detailed financial/buyout model and company-related information to potential lenders
• Letter of intent, detailed due diligence, and pre-transaction checklist (100+ total items)
• Definitive transaction agreements, negotiations and closing schedules

Embarking on the process of acquiring one or more companies is extremely rigorous, requiring organization and attention to detail. Moreover, detailed analysis is critical in determining synergies, valuation and transaction structure, among other variables.

Post-Deal Integration

Most companies are realizing better results from their acquisition strategies primarily due to their integration efforts. Successful integration following transaction completion is critical, but much of the planning should occur well in advance of closing in order to minimize risks and fully exploit all opportunities. And implementation of the plan should begin prior to closing once the deal has reached a high level of certainty.

Since no two acquisitions or companies are the same, the integration plan is customized based on the unique issues, challenges and opportunities of each transaction. Listed below are some of the important aspects of executing upon such a plan:

• Focus on the largest profit opportunities first—e.g. cross-selling opportunities, customer integration, and expense synergies—that will make the most meaningful difference
• Determine key management changes and finalize the reporting structure in order to eliminate people-related issues that otherwise are a detriment to integration
• Assign key managers from different areas to a newly formed integration committee, which oversees integration on a day-to-day basis and is responsible for meeting key milestones, resolving issues, recognizing profit opportunities, reporting to senior management and the board, etc.
• Go above and beyond to deliver consistent and positive communications to customers and solicit their feedback in order to get in front of potential issues early
• Maintain strict focus on both the base and acquired businesses to ensure that key personnel are focused and motivated to execute as they have been historically (“business as usual”)
• Stay on plan—thoughtfulness, execution rigor and timing are key aspects of maximizing integration effectiveness and send employees a powerful message as to the company’s commitment
• Recognize that integration takes time and employees of both companies will need to embrace the various change that affect them both directly and indirectly
• Deliver a consistent message about the newly combined company culture and communicate it clearly internally with employees

Such planning involves the creation of a 180-day action plan that includes action items, assignments, key milestones, etc. across multiple operational areas. Lack of strategic direction or mismanagement of the integration process can lead to issues such as customer confusion, poor performance in both the base and acquired businesses, and the loss of key people. Competitors take advantage of these types of opportunities to take market share.

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The risks associated with internally managing an acquisition process are extremely high and could result in lackluster results or outright failure. Working with a seasoned advisor that is involved in each of the three phases of an acquisition growth strategy is highly recommended.

Opus Advisory Partners provides advice to shareholders, boards and senior management on corporate growth strategies, including all aspects of mergers & acquisitions.  Opus employs an institutional investor mindset to the evaluation, structure and integration of transactions when working with clients to achieve “best practices” results.

Many companies are facing challenges in growing their businesses organically. We expect this trend to continue for the foreseeable future principally based on weakened economic growth (domestic and worldwide) and increasing competition primarily due to disruptive technologies, as well as other factors. For publicly held companies, in particular, there is significant, ongoing pressure to generate continued increases in shareholder value as well as stock price appreciation.

Alternatives such as share buybacks and increased cash dividends are short-term strategies that have recently worked to buoy share prices. Over time, however, these financial engineering methods break down and companies often find themselves in a competitively weaker position. Companies with a successful track record of growth and long-term share price appreciation have instead focused on generating recurring growth in profits through a mix of internal and external (acquisition) growth initiatives.

Buy vs. Build

Most companies evaluate growth initiatives on a recurring basis and often look organically to initiate growth through new products/services or extensions of existing offerings. Senior management may believe that organic growth is simpler and less expensive than finding the “perfect” acquisition candidate. In addition, internal expansion may come with more personal recognition, promotion opportunities and compensation upside to senior management personnel. But the ramifications of this singular strategy may result in a more time-consuming, challenging and costly outcome with potentially more risks.

Conversely, a diversified growth strategy that includes both organic growth and targeted acquisitions can quickly and effectively generate profitable growth and incremental value. Acquisition targets do not necessarily need to be large in order to be considered.  In fact, the acquisition of a smaller target still provides immediate benefits in addition to its own organic growth potential and cross-selling opportunities. Irrespective of the specific strategy or deal size, an acquisition will likely result in immediate increases in revenues and profitability, dedicated personnel and stronger overall growth potential.

Some of the largest publicly traded companies have a successful track record of growing shareholder value because they generate growth and maintain strong margins while staying competitive. And that combination has repeatedly come from making strategic acquisitions as well as simultaneously growing organically (in the base and acquired businesses).  Of the 500 companies that make up the S&P 500 Index, 97% have successfully closed acquisitions.  Moreover, 72% of the S&P 500 have made acquisitions in the last 24 months. Given the availability of inexpensive debt financing, excess cash on balance sheets, and the efficiency associated with buying versus building, we expect this trend to continue.

Synergies and the Compounding Effects on Profitability

Most acquiring companies are able to generate cost synergies by eliminating duplicate or unnecessary operating expenses of the target, thus increasing overall profitability. Overlapping internal support functions and sales roles may provide the greatest opportunity for expense savings. In addition, the ability to cross-sell products/services across multiple customers can result in accelerated growth and incremental profits. And the incremental gross profit attributable to these revenue synergies often comes at no additional operating expense. The compounding effect of this incremental growth in future periods translates into acceleration of revenues, operating profit and shareholder value.

Transition and Integration

Critical to the success of any acquisition is the planning, transition and integration of the target’s business within the acquiror’s infrastructure, from a practical and cultural perspective.  A 180-day plan should be instituted to ensure the following:

• Best practices among both organizations are implemented
• Senior management and employees work collaboratively
• Cross-selling opportunities are maximized
• Infrastructure changes and expense reductions are appropriately realized
• Challenges are immediately identified and solved

Working with an Acquisition Advisor

Choosing to partner with an advisor that has experience in evaluating and executing acquisition opportunities not only greatly improves success but it creates opportunities. An experienced advisor can add tremendous value across multiple disciplines:

• Leading all elements of the acquisition process including acquisition growth strategy, execution, analytical support and integration
• Assessing a market and competitive landscape to determine opportunities for growth
• Identifying and connecting with high-quality acquisition candidates
• Managing and performing detailed due diligence (financial, market/competitive, operations, etc.)
• Providing detailed financial modeling and valuation analysis that accounts for pro forma combined results, upfront costs, integration costs, synergies, etc. on a risk-adjusted basis
• Utilizing a structure that minimizes cost of capital, and if needed, raising the requisite debt financing from various sources
• Assisting with board-level communications, including investment committee memoranda and full presentation materials