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.
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.