Preparing to Make an Acquisition

Preparing to Make an Acquisition
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
service base.
3. The acquisition will change the competitive
landscape.
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
this?”
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
price.
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.

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

service base.

3. The acquisition will change the competitive

landscape.

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

this?”

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

price.

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.


ANTHONY GIZINSKI

Vice President

Fidelity Bank

anthony@fidelitybankmn.com

http://www.fidelitybankmn.com


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2 thoughts on “Preparing to Make an Acquisition

Add yours

  1. Anthony,

    You make some really great points in this article – especially when it comes to the making the mechanics of a deal work, vs. simply focusing on the potential strategic synergies.

    But what’s the best way for business owners to take advantage of depressed valuations? For many it means taking a “look in the mirror”.

    I have recommended, and am working with, several businesses to actually take their companies private via Management Buyouts.

    This economy is an excellent opportunity for good management teams to reward their investors with an exit opportunity. It can also provide the operating executives with a greater potential reward for “sticking it out” in a tough time. And for many companies, a Management Buyout may represent the only “realistic’ exit strategy for some types of companies – especially those where there isn’t a strong M&A story.

    It’s a potentially simpler way to avoid some of the obstacles that M&A transactions present, while still helping the company prepare for accelerated growth coming out of the recession. I encourage all investors to consider this growth option.

    At the Soltus Group (www.SoltusGroup.com) we work with interested parties in an open and collaborative manner to evaluate transactions, and would be happy to discuss this with you or your readers.

  2. Anthony,

    Your article addresses some key points that must be considered when evalutating a strategic transaction.

    I agree completely that a well-thought out strategic transaction could propel your company to powerhouse within your industry. To touch on your point regarding an asset purchase of a competitor, I agree that given the difficult economic climate this may be an option to give your company a greater position within an industry. When evalutating a potential strategic transaction involving a competitor, look for competitors which specialize in a niche that your company may not have under their umbrella of offerings. Creating a type of ‘one stop shopping’ will help you maximize your position in the marketplace.

    Be aware, however, that creating a continuity in operational processes is key to ensuring that an asset acquisition provides the greatest profitability. Lack of continuity in operational structures is often an obstacle in asset purchases and mergers that can hinder a transactions success.

    Thanks for the thought provoking article.

    Best Regards,
    Tiffany A. Kahnen
    LaFlam Sullivan, LLP
    Corporate Attorney working with Mergers & Acquisitions

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