Acquisition Growth Strategy - Maximize your Profitability
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Acquisitions and mergers are an important strategy for businesses looking to accelerate growth.
According to SunTrust Research, 24 percent of business executives are planning to grow their businesses through mergers and acquisitions (M&A) (This includes 22 percent of businesses with annual revenues of $2-9.99 million and 25 percent with annual revenues of $10-150 million.) M&A is one of the top three strategies that businesses are pursuing.
Successful acquisitions offer strategic opportunities ranging from revenue growth to product extension and restructuring of competitive dynamics. "Many factors will affect your acquisition strategy," says John Hluck, Senior Vice President at SunTrust Bank, "however, all begin with a clear competitive strategy, and a strong vision of how that strategy will drive your acquisition plans and outcomes."
Why Pursue Growth through Acquisition
Mergers and acquisitions expand your company’s capabilities and customer base to improve profit-generating revenue. Of the business executives exploring M&A activity, 35 percent are doing so for growth and expansion. Another 13 percent are looking to improve financial success through acquisition.
Businesses choosing acquisition growth strategies look very different from those choosing organic growth:
Display confidence. According to SunTrust Research, executives choosing to acquire for growth have a higher level of confidence in the current and future economy, as well as the strength of their particular industry. That confidence leads them to be willing to take the additional risks that acquisition strategies often entail.
Overcome obstacles. A properly financed acquisition growth plan helps companies overcome the largest obstacles to their growth - lack of capital, infrastructure, high debt ratios and management skills.
Move quickly. Companies can grow faster through acquisition, immediately absorbing new customers and new sources of revenue. Additionally, companies do not lose time creating new technologies, processes or skills, but can quickly integrate and leverage those functions from the acquired company.
Fill gaps. Acquisition can help a business accomplish proposed business strategies rapidly when the acquiring company provides customers, technology, production facilities or even reduces competition.
"Any growth strategy needs to be grounded in business planning that looks beyond the usual planning horizon," says Mr. Hluck. "Take a less conventional look, a Six Year Plan, and tie your acquisition strategy closely to your competitive strategy. A Six-Year Plan gets you out of the mindset of projecting the status quo into the future. That sets the stage for what type of company you will look to acquire, whether you are acquiring strengths or trying to overcome weaknesses, and specifies what you will accomplish once integration is complete."
Your Six-Year Plan will guide you through the purchase process as well as provide a roadmap for execution of the combined company. Integration can then focus on leveraging the most valuable elements from the acquired company to put your company on the path you have plotted for future growth.
Top Scenarios Where Mergers & Acquisitions Make Sense
Mr. Hluck cautions business leaders, "Don’t let M&A fever dilute your current successes by leaving you working harder and with more risk. Crisp strategy execution wins over size." So while economies of scale drive some M&A, the strategic rationale for an acquisition program as derived from the Six-Year Plan can take many different forms.
Looking for synergies between combined companies is a core M&A approach. Value emerges when a business purchases a complementary company allowing it to sell more products to the same customers. This approach can also improve a business’s existing model providing improved product development and more efficient delivery channels. Combining companies that have the same basic product mix can provide cost reduction opportunities through the consolidation of redundant functions such as production or administration. There may also be revenue growth from new sales opportunities and market strength. The newly combined operation also has the opportunity to improve the client experience by offering enhanced products, better pricing or improved distribution channels.
Changing Industry Dynamics
Transformational purchases occur when a business acquires a company in order to enter new markets, channels or in some way transform the integrated company. This approach has been on the rise over the last few years. A PWC M&A survey found that forty-nine percent of respondents undertook a transformation acquisition in 2013, up from twenty-nine percent three years earlier. (PWC, March 2013)
A transformational acquisition changes industry dynamics by providing additional strength over customers, suppliers and/or competitors. Ultimately, the combined company grows large enough to pre-empt – or at least dampen - the effect of new entrants or substitutive products. Transformational deals are more complex and challenging when it comes to integration. The PWC survey also found that companies implementing a transformational strategy tend to struggle more with the integration needed to achieve their most important financial and operational goals.
Successful Business Model
When a company already has a successful business model, it can grow much more quickly by aggressively leveraging its strengths and imposing its existing operating model on others. Finding other, typically smaller, companies that can benefit from its expertise, has proven to be a successful growth model. The target business should have some intrinsic value, such as a desirable product or technology, which can be leveraged across the business. PWC calls these transactions "tuck-in deals” and has found that tuck-in acquisitions have the highest core competence among companies they surveyed, as well as the highest level of success in strategic, financial and operational integration performance.
Weakness in Business Model
In some cases, a company can overcome gaps in its business model more quickly and cost effectively by purchasing a company that has proven successes in targeted functions. The integrated company can rapidly leverage the newly combined management talent and skills to find new ways to increase sales through access to new products, new markets, distribution channels or technical advances not previously obtainable by the individual companies. Gaps in skills, production technology or capacity, customer acquisition or brand marketing can all be improved by purchasing a company that has the functional track record to grow a business successfully.
Final Steps towards Acquisition
While the goals and objectives of your Six-Year Plan should guide your acquisition search and selection, don’t lose sight of the basic tenants for a good acquisition target. The target should be a business or industry you know, have a history of good earnings and management and should have key staff and leaders willing to stay and help run the business.
Structuring the Deal
Capital planning helps you find the best financial structure and capital mix for your business acquisition plans Decisions about whether you will purchase assets or stock, the right mix of cash, debt and equity and sources of financing all affect the structure of the deal. Consult with your banker and financial advisors to discuss all options available to you, and the financial systems you should have in place to implement the purchase and integration. SunTrust Research indicates that 35 percent of executives pursuing an acquisition growth strategy have refinanced current loans and 42 percent have taken out commercial loans in the last twelve months.
A thorough capital structure review will explore refinancing, leasing alternatives, revolving credit, real estate financing or asset based lending to help you structure the best deal. Small to mid-size companies should also review SBA loans options and terms to determine suitability.
In today's business environment, cost of capital is historically low. "Having the right leverage plan in place could actually prove to be cheaper than not financing at all,” says Mr. Hluck.
It is never too early to start planning the integration of the two companies. A detailed integration plan will align with the strategy that brought you to the purchase in the first place. That includes ensuring that your management team and top level staff are intimately involved in the plan, and will have specific responsibilities in their areas of expertise. Clear communication of tasks, with associated goals, and set timetables, along with plans for milestone meetings will safeguard a smooth implementation of your newly combined entity’s integration.
Setting the Deal Team
"Getting the right advice, and putting together the correct group of people to implement your acquisition is critical to your success," says Mr. Hluck. "We see most companies include banking, CPA and legal teams to help manage the deal and provide the wide variety of expertise your company will need to successfully approach, structure and transact the final deal." Your team can help you anticipate the financial, market, and operational data your business will need to structure a deal. They can play a big part in the due diligence necessary to ensure you know exactly what you are buying and what obligations you are taking on. Because due diligence encompasses multiple aspects, such as financial analysis, customer and supplier contracts review, intellectual property assessment, employee contract and skill review and legal and tax implications, having different functional expertise on your team makes your business much better prepared to successfully complete the acquisition while mitigating any associated risks.
Having the right advisors and partners in place to support your acquisition strategy is critical. Whether it’s networking to build your team, securing acquisition funding, identifying and communicating with target businesses, or understanding long -term strategic options, your SunTrust Relationship Manager is a great place to start. Your Relationship Manager can help you with advice and access to a team who can support your every financial initiative. To find out more, call you SunTrust Relationship Manager or visit SunTrust online at suntrust.com.
PWC. (March 2013). M&A Integration: Looking Beyond the Here and Now.
This content is educational in nature and is not an advertisement for a loan or business solicitation. It does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
Margaret Callihan, President and CEO of the South Florida Division for SunTrust Bank, discusses how businesses in her region are partnering with their bankers to finance growth, streamline financial operations and address their short-term cash needs