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2Method Advisory Insight #2
Acquisition Strategies
Accelerating growth
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Take Aways
1. Acquisitions should form part of a companys
overall strategy
2. Poor evaluation and integration planning lead to
the greatest risk of failure in acquisition activities
3. Companies make acquisitions for two reasons:
acquiring resources or business models
2
IntroductionThe growth of most businesses can often be limited by internal
and external factors over which the business may have littlecontrol. Organic growth via increasing overall customer base,
increased profit margin per customer, new sales or market seg-
ments can be incredibly difficult to achieve.
Most private businesses never grow beyond a small number
(
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Developing an Acquisition StrategyMany entrepreneurs dismiss the potential of acquisitions be-
cause they lack experience in M&A and believe that we are not
big enough to undertake an acquisition.
We believe that acquisitions can play an important role in com-
panies of all sizes so long as they consider acquisitions as part
of their regular growth and strategic planning process and regu-
larly review whether an acquisition makes sense to achieve spe-
cific goals.
With this approach, an entrepreneur can build a highly success-
ful acquisition strategy by following a logical plan, that acknowl-
edges areas where they may lack experience, and ensures any
potential acquisition opportunity fits within existing growth crite-
ria.
The plan would typically have the following elements:
Education
Acquire knowledge about the acquisition process. As most ac-
quisitions are between 15-50% of a current company size
(measured by headcount or revenue), its likely that this will be
the largest investment the company ever undertakes. A com-
panys management team should access the wide range of in-
formation available on the subject and take advantage of theeducation and insight that can be provided by professional advi-
sors.
Most acquisitions will require the services of an accountant, law-
yer and possibly additional services from an investment bank,
corporate advisor and financial planner. Select advisors that in-
clude transaction work as part of their core competencies.
Also, make use of industry mentoring programs, such as TheExecutive Connection or Entrepreneurs Organization to reach
out to other business managers and owners that have signifi-
cant acquisition experience.
Build Expertise
Build expertise and develop strategic relationships with others
which will bring experience into the process. The management
team should conduct their own skills audit to determine what ac-
quisition skills/capabilities already exist in-house. The acquisi-
tion process will involve tasks such as strategic planning, gap
analysis, market/trend analysis, financial modelling, identifying
potential target companies, building relationships with potential
target companies, managing due diligence, negotiating, post-
merger integration and project management skills.
Education BuildExpertise
DevelopGrowthStrategy
IdentifyAcquisition
Targets
Develop
Evaluation &PurchaseProcess
DevelopIntegration
Plan
ImplementReviewProcess
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If an external M&A consultant is required, they should have spe-
cific knowledge of your industry and experience in transactions
relevant to the size of your company and the target firm. If there
is a significant amount of post-merger integration work to be per-formed, it is wise to have that person employed full-time within
your management team.
It is common to underestimate the amount of time (and money!)
spent on preparing for an acquisition, which may not even be
successful. Once you have in principle agreement with your tar-
get, the time commitment will also increase substantially. For
this reason, it it makes sense to bring additional capacity on-
board to assist with the transaction as your existing manage-
ment team will be unable to carry out their day-to-day duties
and commit the time necessary to an acquisition.
Develop Your Growth Strategy
The starting point for any acquisition must be to focus on the
overall growth strategy of the business. Without taking the time
to develop a growth strategy, an acquisition is nothing morethan an opportunistic purchase - which isnt a strategy - its
growth by luck and hope.
The Ansoff Matrix shows four ways that businesses can grow,
and helps people focus on the risks and tasks associated with
each alternative.
It provides a quick and simple way of thinking about growth.
Market Penetration
A market penetration marketing strategy is very much about
business as usual. The business is focusing on markets and
products it knows well. It is likely to have good information on
competitors and on customer needs. It is unlikely, therefore,
that this strategy will require acquisitions to fuel growth.
MarketPenetration
(sales to existing
markets of existingproducts and services)
Diversification(sales to new marketsof new products and
services)
MarketDevelopment
(sales to new marketsof existing products
and services)
ProductDevelopment
(sales to existing mar-
kets of new productsand services)
Markets&Customers
Existing
New
Products & Services
Existing New
Ansoff Matrix
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Market Development
The product remains the same, but it is marketed to a new audi-
ence. Exporting the product or marketing it in a new region, for
example, may require accessing new distribution channels
which could warrant an acquisition strategy.
Product Development
The business aims to introduce new products into existing mar-
kets. This strategy may require the development of new compe-
tencies and requires the business to develop modified products
which can appeal to existing markets. This approach may war-
rant acquiring external skills, capacity or technologies to acceler-
ate the product development process.
Diversification
The business markets completely new products to new
customers. There are two types of diversification, related andunrelated diversification. Related diversification means that thebusiness remains in a market or industry with which it is famil-iar.
This is an inherently more risky strategy because the business
is moving into markets in which it has little or no experience.
This may be a strong candidate for using an acquisition to
achieve diversification.
With each of these growth options, the company has a choice
to pursue the option organically or accelerate the growth strat-
egy through an acquisition.
Identify Acquisition Targets
Acquisition selection criteria should be established that enable
the business to achieve its growth strategy. Criteria may include
geography, product and market characteristics, company cul-
ture, profitability or unique access to skills, capabilities or intel-
lectual property.
Once the selection criteria have been established, a list of po-
tential targets can be developed and prioritized.
Evaluation
When acquisitions fail, it is generally caused by the acquiring
company failing to objectively and systematically work through
an evaluation framework. In many cases the acquirer does not
know (or loses sight of) what they are buying.
At a minimum, the evaluation process should question:
How committed is the seller?
Exactly what is the benefit expected from the acquisition?
Will the acquisition be integrate into our existing business or
maintained separately?
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Are valuation and deal terms likely to be agreed?
Can we verify key information and articulate the inherent risks
with this acquisition?
What timescale and activities will be required for post-
acquisition integration
Develop An Integration Plan
Once the acquisition gets the green light an integration plan
should be executed that protects existing customer relation-
ships and revenue and communicates the changes to staff, cus-
tomers, suppliers and partners.
Implement a Review Process
A review of the acquisition is an important step in building corpo-
rate know-how, refining acquisition and growth strategies and
improving the probability of success for future transactions.
How Can Method Advisory Help?
Method Advisory specialises in providing transaction assistance
to mid market technology companies. We can assist with
growth strategy, acquisition selection criteria, target identifica-
tion and deal negotiation.
Typically, our engagements are when our client knows they
have a growth/capability gap, are not sure about who they
should target or what the potential synergies would be from an
acquisition.
We use a very discrete (and sometimes anonymous) approach
to identifying and evaluating potential targets.
The total time required to run an acquisition process varies
greatly, but the following is indicative:
Action Weeks Parties
Establish strategic rationale for acquisition 2 Joint
Establish acquisition criteria 4 Joint
Research and map prospective targets 5 Method Advisory
Validate target list 5 Method Advisory
Initial approach to targets 9 Method Advisory
Initial meeting with targets 12 Method Advisory
Qualify targets 12 Joint
Issue offer 14+ Joint
Negotiate offer 16+ Joint
Complete acquisition 16+ Joint
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If you would like to discuss your acquisition strategy, we would
love to hear from you. You can reach us by emailing
[email protected] or visiting www.methodadvisory.com
for more information.
Method Advisory Pty Ltd 2013
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