Seizing the Moment

With the economy weak and business financing tough to come by, acquisition activity has slowed significantly during 2009. A few observers have simply concluded that this is a bad time to initiate mergers and acquisitions. While acquisitions are always risky, they are not just a strategy to be pursued during strong economies. Smart companies who have cash and are not over-leveraged should continue to use acquisitions as a key strategy for business growth and positioning, helping them to be better tomorrow than they are today. Tough times present cost-effective opportunities to acquire overleveraged or undermanaged businesses from sellers who need cash or need to focus on their core business.

To successfully acquire another business, you need to be well-prepared in any economic environment. You need a deep understanding of the strategic and cultural fit of the acquired business and the potential for future growth and profitability. A well-thought strategy, price discipline, thorough due diligence and an effective integration process are always important. Potential acquirers – who feel the present economic turbulence enhancing these risk factors – may find these tasks daunting, and respond by slowing the process. While slowing down is a natural reaction to perceived risk, it may actually prevent you from capitalizing on important opportunities.

Fortune favors the courageous. The first step to a successful strategic acquisition process is engaging the process directly and head on. Postponing actions for months or years until “conditions” improve forfeits quality opportunities that are quickly purchased by proactive, prepared companies. Focusing on market timing is rarely a successful business growth strategy if your company fails to respond to today’s specific opportunities and needs. Often, a postponement also sets aside the whole learning process and activities that are keys to the future success of a business.

Fortune favors the prepared. The next step is having good acquisition criteria. This means knowing what you are looking for—what additions will most profitably enhance your business. Well-thought strategic acquisition criteria serve as a roadmap that helps direct action, capital and focus, and provides the blueprint for an appropriate addition. Not infrequently, we ask companies to share their acquisition strategies and are told, “to grow 15% annually through acquisitions.” When we ask them precisely what they are looking for and how that will improve their business, they do not have an answer. Many potential acquirers will ask us to show them whatever opportunities we come across. When we ask if they would know a good match when they see it, they often have to admit that they would not. Unprepared acquirers are more likely to fail because they fail to recognize the growth potential and strategic and cultural fit of a potential acquisition target.

Fortune favors the bold. A third step is approaching acquisitions proactively rather than reactively. How likely is the right company to just fall into your lap when you want or need it and are prepared to pay for it? The success rate is far greater for people who plan how they will improve the value of their business and then execute on that plan. Successful execution means discovering many viable acquisition prospects. Transactions often fall through or people back out. Developing multiple potential opportunities presents more possibilities to evaluate and learn what will work best for your company and increases the likelihood of completing a successful acquisition.

Fortune favors the focused. A fourth step is continuing to concentrate on and build your core business. We are occasionally asked by business leaders where they can gain expertise in mergers and acquisitions, perhaps through courses or books. Acquisitions are the most complex business transactions and there are dozens of skills needed, including valuation, accounting, tax, legal, government regulation, integration, negotiations, due diligence, equity and debt structuring, and all of their subsets. M&A advisors, along with good attorneys, accountants and other advisors, handle the details of the process so that the acquirer can focus on learning about the target business and developing a plan to make it successful. Corporate leaders need to be involved in defining acquisition criteria, evaluating potential targets, financial analysis, due diligence, decision-making and integration. To prevent the acquisition process from detracting from business management and operations, however, business leaders need to engage skilled advisors.

Companies that prepare and are courageous enough to seize the moment to make acquisitions are more likely to win, and many of the winners will be determined by actions taken during the next six to nine months.

Jim Gettel and Lou Banach are Managing Directors of Schenck M&A Solutions and each have over 20 years of experience in helping businesses with strategic growth. Schenck M&A Solutions is an advisor to privately-held middle market companies in strategic acquisitions, divestitures, recapitalizations, turnarounds and planning.

May 2009