First appearing in the Minnesota Business Journal 4/19/09
Given the current economic conditions, you may be facing an opportunity to acquire a long-time competitor who is now struggling. Acquisition might open the door to a new market, or it might mean the addition or expansion of a line of complementary products. Some acquisitions, like marriages, are made in heaven.
Such a union of two companies can boost revenues, cut costs and increase market share. Other deals – also like some marriages – are made in hell. There are turf battles, management deadlocks and employee morale issues that can easily undermine the entire deal.
The challenge in making an acquisition work is to define and then stick to a solid process – from target selection to approaching your commercial bank for financing. Assuming you have decided to embark on an acquisition strategy, how do you identify an appropriate target? The “right” opportunity might mean gaining access to a cutting-edge technology, or bailing out a financial or management distress situation. The result may be reduced costs due to increased synergies, or positioning the new organization for growth. When selecting a target, one or more of the following outcomes should be expected:
1. The deal will lower your overall costs.
2. You will be able to increase the combined
company’s market power by spreading the
stronger brand name over a wider product or
3. The acquisition will change the competitive
Once you have eyed your target, serious due
diligence begins. Let’s look at some potential
pitfalls that would need to be addressed:
1. Compelling strategic rationale. Make sure
you can answer the question, “Why am I doing
2. SWOT analysis. Have you identified the
company’s core strengths, market
opportunities, and any potential threats?
3. Customer satisfaction. What are the
customers of the target company buying, and
what do they define as satisfaction?
4. The “people” factor. If you are not paying
attention to employees and what this means to
them, you can kiss a great outcome goodbye.
Now, when it comes to actually financing the
acquisition, you’ll no doubt talk to your
commercial banker. At Fidelity Bank, we
consider ourselves an impartial third party in
helping our clients in acquisition mode,
beginning at the exploration stage. Let’s take a
look at some critical issues we like to keep in
mind when working with a client who is
seeking financing for an acquisition:
1. Payback. Before making that critical “go,
no-go” decision, you need to measure
objectively the payback period on the purchase
2. Not So Sudden Impact. Set realistic
expectations. Do not underestimate the
challenge of achieving synergy and savings.
3. Consider Collateral. Remember, however,
that advance rates on many asset types have
decreased during this economic downturn.
4. Structurally Sound. The important thing
here is to keep in mind that all the pieces of the
deal have to cash flow, especially with bank
financing playing a smaller role in the overall
structure of acquisitions.
Showing your commercial banker that you
have considered each of these last four areas
and have addressed all the issues covered above
will contribute significantly to getting the deal
done, quickly and efficiently.
Have something to add? Your own business wit?
Got a different point of view, want to play devil’s advocate, or just think we’re all wet? Post your experiences or examples.