Successful Buy Side Mergers And Acquisition Search

Successful Buy Side Mergers And Acquisition Search

Successful Buy Side Mergers And Acquisition Search, Last Modified, 2017-05-08

The Case for Strategic Acquisition Search
Companies generally pursue acquisitions in three different ways. These sourcing approaches
are defined in the graphic below.

This will come as no surprise; Opportunistic Acquisitions have the lowest probability of closure
and the lowest probability to add value after execution. As you can imagine, responding to an
opportunity that falls into your lap, that doesn’t relate to your stated acquisition strategy, could
work out, but is really a role of the dice.

Reactive Acquisitions have a higher probability of closure and value addition because the buyer
has taken the time to think through the market strategy. However, the fact that the buyer is
approached by the seller means that the seller is likely circulating the opportunity to a number
of potential buyers. This can put the buyer in a position of weakness when it comes to
negotiating especially when the seller has initiated a competitive process.

Proactive Acquisitions, which are identified through a strategic acquisition search process, have
a high probability of success (success being defined as both deal closure at a reasonable price
and achievement of effective post acquisition integration). The focus of this guide is to describe
the proactive approach that we call Strategic Acquisition Search.

Implementing Strategic Acquisition Search Process
The strategic acquisition search process is not rocket science, but most middle-market
companies that we interact with who have pursued this on their own, have missed critical parts
of this process.

Here are the process steps:
1. Define your acquisition strategy
2. Test your investment criteria
3. Build the target list
4. Begin target outreach
5. Manage the funnel

Start with Strategy
Companies generally take one or more of the following strategic approaches to acquisitions with the first being the furthest away from the company's core competence.
Diversifying,
Complementary,
Strategic and,
Highly Synergistic.

The first strategic approach, which is closest to the
company’s core competencies involves the search for
"Highly Synergistic" acquisitions. An example of a
highly synergistic acquisition target could be a
competitor or a company that may or may not compete
directly in the same geographic market, but is in the
same business as they provide similar products or
services to similar end markets and customers. When
acquiring these companies, there are immediate
synergies in terms of added customers and market
share, reduced back office, and operational and
purchasing efficiencies.
A perfect example of this is RWE Group. Through its various subsidiaries, the energy company supplies electricity and gas to more than 20 million electricity customers and 10 million gas customers, principally in Europe. Essent is the largest energy company in the Netherlands. Belgium is their second home market. Essent provides customers with gas, electricity, heat and energy services. Essent (including its predecessors) has over 90 years experience of generating, trading, transmitting and supplying electricity. Essent has 2.3 million customers for electricity and about 2.0 million for gas.

With RWE Group acquisition of Essent. RWE Essent is very focused on a particular niche within
the energy sector distribution. RWE's strategy was to acquire smaller companies that were distributing
similar products that were sourced from similar vendors. Acquiring additional companies in
their industry allowed for greater purchasing power from their key vendors and increased
revenue through their national sales group. Regulated energy markets tends to place a cap on the pricing side of the business, so synergies tend to come from cost reduction strategies. Consolidation ensures savings and scale purchases in consulting and infrastructure costs are considerable.

Essent N.V. and RWE AG today completed the transaction they announced on 12 January 2009. Welcoming the Dutch company to the RWE Group, Juergen Grossmann, CEO of RWE AG, said: “This truly European partnership is a commitment to our company’s strategy in our core market: sustainable growth and innovative, climate-friendly power generation to better serve our customers. Together with Essent, we have even more energy to lead.” And he added: “We are extremely pleased with this addition to the RWE family. RWE and Essent make an ideal pair.”
Michiel Boersma, outgoing CEO of leading Dutch utility Essent, stated: “We found the best possible partner for Essent in terms of commitment towards a more sustainable future and financial power needed for ongoing investments in the Netherlands and Belgium. All of Essent’s stakeholders will benefit from this strong partnership.”

Peter Terium, the new CEO of Essent, added: “Today marks an historic day for us. The partnership with RWE is good news not just for Essent’s employees but also for our customers in the Netherlands and Belgium. Our goal is to perform optimally on customer service, competitive tariffs, sustainable energy production and innovations like e-mobility.”
All shareholders tendered their shares
All of Essent’s shareholders have accepted the RWE offer, so RWE has been able to acquire 100% of the issued and outstanding shares of the Arnhem-based company.

They executed and successfully integrated 4 acquisitions in a period of 12 months. The highly synergistic nature of the acquisitions led to
accelerated deal timing and smooth post-acquisition integration.

The next approach is "Strategic," where the buyer seeks targets where synergies are evident, but require some work to achieve. Examples would include a target that has similar products, but sells to other end markets or a target that offers different products, but sells to the same
end markets. While the cost synergies between the two companies are less significant, the potential revenue synergies and growth opportunities may be very high.

The next approach falls further away from the buyer's core competencies, which is to seek "Complementary" acquisitions. These types of acquisitions may have some minor overlap in products, markets or capabilities, but do not provide any real synergy value. An example of a complementary acquisition would be a company that manufactures engineered industrial products that is acquiring a target company that also manufactures engineered industrial products, but for different applications in alternative end markets. The synergies tend to be indirect and may involve sharing engineering resources and know how or operational best practices.

The final approach, is to seek out "Diversifying" transactions where the target company has no overlap whatsoever with the acquiring company. We sometimes meet companies that believe they should diversify their business through acquisition, but struggle to identify alternative industries of interest and related target companies. As you would expect, these types of acquisitions have the lowest probability of success, both in terms of finding and closing a transaction and in post closing satisfaction.

In many cases, the seller will even be familiar with your company before you approach them. In other cases where the seller is not familiar with your company, a simple perusal of your website will result in immediate clarity for the seller as to your strategic intentions.

So back to our four approaches to Strategic Acquisition Search, we recommend that you focus on Highly Synergistic and Strategic acquisitions. This is not to say that certain companies can't succeed in taking a complementary or diversifying approach to acquisitions, however, our experience is that the likelihood of enticing a target company to sell and the likelihood that an acquisition is ultimately successful is significantly increased when you are pursuing acquisitions that are closer to the company’s core. For evidence of this difference, look no further than the inevitable increase in corporate divestitures in a slow economy when companies focus on their core activities and decide to sell off non core businesses.

Believe it or not, many companies struggle with this step. We've seen many companies start with a stated goal to only pursue strategic acquisitions, but then somewhere along the way they lose their focus and begin to pursue anything and everything that might be for sale.

Alternatively, we sometimes have new clients who believe they should diversify through acquisition, but typically conclude that the risks outweigh the benefits once we discuss the factors noted above.

Rounding out the Strategy

If you make the decision to focus on Highly Synergistic and Strategic acquisitions, you’ve already come a long way to establishing a viable acquisition strategy. The next step is to really flush out some of the details.
1. Which growth objectives can be achieved more successfully with an acquisition versus internal sales and marketing resources or a greenfield start up?
2. What product or service area do you intend to be the focus of your first acquisition campaign?
3. What types of synergies do you expect from acquiring a company in this industry segment?
4. Do you have a minimum profitability hurdle in mind?
5. What is the maximum size you are comfortable acquiring? You should talk with your lender to get a sense for borrowing capacity.
6. What is the minimum size of a company you might acquire? Buy too small and you’ll incur a high relative cost to getting the deal done.
7. How many companies do you believe meet the criteria from your answers to the two questions above? This can be a guess at this point, but it is important to think through.
8. How many acquisitions can your team execute and integrate in a given year?
9. What acquisition pace makes sense over the next five years?

At one past client we consolidated 140 companies, in under two years, into a business groups of 11. Savings and control were substantial, as we later sold off much of the business that was deemed non core. Essentially asset plays, management were in a position to aggressively ramp up acquisitions in a buy first look for nuggets style of approach, this was the dot com era and many of the companies were not nuggets in the end but the net group effect as a business combination was to become the foundations of what today is one of the worlds most successful media organisations.

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