By Thomas W. Kerchner and David K. Clark, BMI Mergers & Acquisitions.
Sometimes business owners dream about dominating an industry or a territory and becoming the impressive “800-pound gorilla” in the room. There is nothing wrong with wanting to grow your business. In fact, it’s been said that “if you aren’t growing, you’re dying,” and purchasing another company to merge into your existing business is one of the fastest ways to grow and enhance your company’s value.
Be Careful!
Don’t let your zeal to grow your company as quickly as possible get in the way of making good business decisions. Avoid the idea that you are doubling the size of your organization or that your company will now be a national organization. Deciding to acquire a new company for the sole purpose of creating a larger company is almost always a mistake.
Check your ego at the door and follow a disciplined approach to evaluating the potential acquisition. Do not take a narrow view; look at the entire entity and how it will fit in with your existing organization. Try to anticipate potential problems and issues that could arise when integrating the two entities.
Start by letting the target company know that you are serious and professional by respecting confidentiality and timelines. Be prepared to explain your goals early on and provide a confidentiality agreement at first contact.
Then, begin to thoroughly review the target company’s environmental, regulatory, and legal issues, as well as its operational, marketing, intellectual property, and tax situation. That includes evaluating the target to determine how it might complement or magnify your strengths and weaknesses. Perform complete due diligence with the help of an experienced team that includes a reputable Mergers & Acquisitions advisor, an attorney, and an accountant. Address major issues first, so the process can be stopped before investing too much time and money if the potential deal is not making sense.
Involve enough of your team to fully evaluate the target and still maintain confidentiality and encourage open discussions among your management team. According to the Charlotte Observer, the mortgage executives at Bank of America were opposed to the $1.5 billion dollar deal to acquire Countrywide Financial in 2008. However, they were not seriously consulted prior to the acquisition. Because of Countrywide’s practices, bad loans, and bad reputation, the acquisition ended up costing Bank of America in excess of $40 billion dollars.
Then, take a very close look at the target company:
- Culture –Take the time to understand the new business’s people and culture, as this is often the number one reason that mergers fail; prime examples include Time Warner and AOL, Compaq and HP, Nextel and Sprint, Daimler and Chrysler. Understanding the culture can include how a company interacts with its customers, the focus of a company (R&D vs. marketing) to something as simple as dress code and flexible work hours. It can be very difficult to combine different cultures successfully.
- Customers – Don’t simply look at the number of customers you will acquire. Consider the quality of those customers, the strength of the relationships between those customers and the business, if your customers overlap, and any issues your target company may have with its customers.
- Price – Make sure that the price you pay for the target company is equal to the benefits obtained, that the target company will provide the needed working capital (or you need to look at it as an additional investment), and that the purchase of this company doesn’t limit your ability to respond to changes in the industry moving forward. Finally, while you should consider possible synergies, such as revenue enhancement and cost savings, you shouldn’t count on those synergies or give the seller a price based on them.
- Industry – Each industry has a unique set of regulatory and competitive pressures. If the target company is in your industry, don’t assume you know the suppliers, business, and industry. If it is not in your industry, take extra time to understand the issues of that industry. A prime example of two seemingly similar companies merging and failing is the Time Warner/AOL merger. Both were media companies but in very different industries. The dot-com bust led to reduced ad revenue and a smaller market share with the rise of high-speed internet. Plus, the internet was changing quickly.
- Management – Evaluate the management team without the owner or owners. Usually, they will have a one to five year exit plan. Determine what holes will need to be filled now or in the future.
- Product or Service – Complementary products or services can be great for adding value to your business, but be wary of buying obsolete or outdated product lines or services. Review the distribution channels for both companies to ensure that they are compatible. When Quaker Oats bought Snapple, they assumed that they would be able to push Snapple through their current distribution system, which consisted of large supermarket chains. Unfortunately, Snapple built their distribution by appealing to small independents. Quaker Oats ended up selling Snapple for a $1.4 billion loss.
- Equipment and facilities – Are the equipment and facilities up-to-date? Will additional money be required to maintain or update them? Are there opportunities to increase productivity and reduce costs with new investments?
Mergers can and do work, but you need to execute due diligence with a disciplined review process to ensure that the acquisition truly makes sense for your organization. An experienced Mergers & Acquisitions advisor can help with the assessment, smooth out the process, keep you from losing money, and…help you buy for the right reasons.
BMI provides acquisition services – https://www.bmimergers.com/services/targeted-acquisition-service/