The statistics are frightening. By most reckonings, 77% of company acquisitions fail. That failure rate has nothing to do with luck. It is the telltale statistic of widespread ignorance. Now when I say “ignorance” I don’t mean lack of expertise. That’s the paradox. 

I often encounter clients who tell me, “Yes, we have an in-house M&A expert…” It turns out the expert really does know a lot — about due diligence, or company valuation, or negotiation. The problem is, a chef who’s only mastered salad dressings is unlikely to run a profitable restaurant. 

Buying a company successfully depends on knowing more than one piece well. It requires your mastery of an entire, integrated process, with all the functions working together. When I am teaching M&A — to doers, not academics — I often use the phrase “from beginning to beginning.” My point is that the end of a transaction marks the beginning of a whole new business reality, the merged entity. Between those two beginnings lies a sequence of steps, each of which must be diligently completed for a successful outcome. It’s a journey, and any journey significant requires preparation. 

In the harsher climate we’re heading into, the risks of failure in M&A are sure to increase. At the same time, for those with the right map in their hands, the opportunities for reward may be commensurably greater.

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If you want to read a decent book on M&A, be prepared to spend $70 or $80, and set aside several days to plough through a heavy-duty tome for business students. There are exceptions, but for the average business reader there’s remarkably little to guide you through our world of deals.

So I’m writing a book. And it won’t be 500 pages long, or cost $70! The working title is “A CEO’s Guide To M&A” and its really for the kind of people I do business with — leaders of substantial companies and divisions in the mid-market sector. 

M&A has a peculiar aura in the business world. On the one hand, there’s the fascination of massive corporations eating each other alive. On the other hand, there’s all that dreary academic literature. The subject seems simultaneously glamorous and impenetrably dull. 

In reality, most acquisitions are not multinational mega-deals. Every year, hundreds of transactions are consummated between companies below the $1 billion revenue level, the majority privately owned. You will rarely read about these deals in the business press, and by definition a private transaction yields less public information. Yet this activity is absolutely essential to a healthy economy. 

One thing I’ll be emphasizing in my book:  the true function of an acquisition is not just growth, but recalibration. Buying another company will change yours, for better or worse depending on how strategic your approach. By the same token, M&A as a whole serves to recalibrate entire industries. It’s one of the market’s most effective mechanisms for self-correction and positive evolution.

That’s why I’m hoping my work will interest the general reader, as well as CEOs. The better you understand acquisitions, the better you understand business itself.

Technorati Tags: acquisitions, Capstone, David Braun, External Growth, Growth, Integration, M & A News Acquisition Strategy, M&A, mergers, Mergers and Acquisitions

“Our strategic plan calls for us to double our size…” I hear it often. As a plan, it’s usually very successful in 

doubling the stress of frustrated executives. By massive efforts to improve products and smarten the marketing, they can get revenues from $100 million to $125 million. But $200 million? They pay lip service to the dream of “doubling” but in their hearts they know it’s a pipe dream. 

Which it often is, if your only engine is organic growth — that’s to say, growth from the inside of your current operations.

The missing piece here is M&A. In many cases, the only realistic way to hit that major goal is growth through acquisition. So why don’t more companies look to M&A as a serious strategic component?

Often the reasons are quite practical and mundane. Nobody has the time for it. The idea of an acquisition gets tossed around, and it looks quite sexy. But who will get in trouble for not pursuing it? Whereas a failure to lift those sales numbers, or shave that margin, or accelerate that product line, can hurt your career. 

Pushing the envelope of organic growth can consume all the time and energy a company has, and leave nothing to spare for M&A — ironically, the potential engine for massive expansion. 

One possible solution: enroll a third party to lead and manage your acquisitions program. You’ll still have to invest some internal time and resources, but the burden shifts to an outside expert and it will be their job to push the M&A program forward. 

Leaving you time to squeeze another inch of growth from your existing business.

This post was contributed by Capstone’s Managing Director, John Dearing

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The year is closing out and it’s budget season again, a time to look ahead to 2009. Despite the chilly economic climate, there are plenty of companies doing pretty nicely thank you. At Capstone we have a number of successful clients who have their current operations nailed down. Products are selling, customers are loyal and they have their internal systems down to a science. 

For them, the temptation now is to simply hold course and watch as weaker competitors get tossed around by the waves of fear and crisis. Conventionally, the only strategic thrust you’d see here would be for still greater efficiencies and an uptick in customer service. 

Instead, our clients are taking a more aggressive stance and pushing for new external growth. They are in research mode, hunting for the next transformation in their industry and they are looking at acquisition as the key to expansion.

 A quote here from Peter Drucker:  “Traditional planning asks — what will happen next? Planning in times of uncertainty asks instead — what has already happened that will create the future?”

If you spend a bit of time and energy looking around corners, you can use the current environment to plan exceptional external growth three to five years out. But why acquisitions? Because this isn’t about transforming your current success into something else. It’s about launching new initiatives in parallel with your mature operations. The right external partner can bring something new and different to your mix, protecting you from the natural decline that follows maturity and extending your company lifecycle into the next decade.

The message I get from these forward-thinking clients of ours? Ignore the gloom-and-doom press, invest in market intelligence and look for opportunity outside your own four walls. A little time spent here could generate huge returns in the years to come.

This post was contributed by Capstone’s Managing Director, John Dearing

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Dark times on Wall Street and gloom in the real economy… but for companies seeking external growth there are gleams of hope from distant quarters. Funds continue to pour into the US from abroad. I just spent time with an economic development group hosting a contingent of matchmakers from China — entrepreneurial types looking for the hot areas here in the US. Healthcare, medical technology, food, capital equipment… All these are getting attention for potential courtships. 

The influx of cash was first stimulated, of course, by a weak dollar but now the greenback has leveled off there is still plenty of interest from overseas. Why? Troubled times are rich in bargains, and cash-rich buyers can smell them from far away.

The opportunity street is not one-way, however — particularly for US companies ready to think outside the box. Obviously, troubled firms can gain liquidity by selling, but that’s not the only option. 

It’s a common misconception that the world of M&A is neatly divided between buying and selling. In reality, there are many shades between and this is where the gold may lie for American companies. Take the trouble to research, and court, some of those hungry visitors to our shores and you’ll find opportunities for all kinds of other deals, like marketing partnerships, JVs or minority investments. 

Rather than throw in the towel and sell, you could use foreign money as leverage for external growth.

This post was contributed by Capstone’s Managing Director, John Dearing

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I was asked the other day what can be learned from the possible merger of GM and Chrysler. Specifically, what might this union of giants teach the M&A market lower down the food chain?

As I’ve said elsewhere, this is a time when corporate mergers can appeal to those struggling with a hostile economic climate. Reducing competitive pressure, cutting costs, gaining market share… All seem like good outcomes when two players in the same market consider forming a single new entity.

My concern about the GM-Chrysler engagement is that it models a marriage based on weakness. Both companies are in trouble, and in my experience two failures don’t make a success. The underlying problem is that mergers of this kind are driven by an agenda to cut costs. No company grew rich on that agenda alone. To win the business game, you have to keep developing new products or finding new markets — or both.

On the positive side, a merger of this kind can buy you time. That may be good enough reason for the auto makers to tie the knot. But only if they immediately launch a proactive campaign of true innovation in products and/or marketing.

And that should be happening anyway.

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When it comes to funding acquisitions, banks are still holding tight to their money — unless you count the special case of banks buying other banks, which is causing quite a stir in the wake of the government bailout. The fact is, this is still a tough time for M&A, especially in what I have called “the wedge”: M&A transactions between $1bn and $10bn. Smaller deals continue under the radar, and the mating season of the behemoths never ends. Witness the prospect of GM and Chrysler merging.

In the wedge, a huge area of M&A activity, private equity is being told to wait. Banks aren’t playing and neither are the battered hedge funds. So we can expect a hold on most LBOs (leveraged buyouts) until at least the early part of next year. However, not all private equity firms are taking this lying down. They are turning away from traditional sources and seeking capital elsewhere — specifically, the public markets.

The result: we’re seeing renewed interest in SPACs, or Special Purpose Acquisition Companies. These are basically IPOs launched purely for the purpose of buying companies. How quickly this trend will increase is an open question, but it’s certainly a development to watch over the coming months.

Technorati Tags: Acquisition Strategy, acquisitions, Capstone, David Braun, External Growth, Integration, M&A, mergers, Mergers and Acquisitions

Writing this post on November 5^th, one is bound to be thinking about the outlook for M&A under a new Democratic government. 

The people I do business with are looking at two major unknowns: tax and regulation. Both are cause for concern as the political map gets redrawn, and both may have a depressing effect on mergers and acquisitions.

At the same time, we should also ask ourselves who might do well under a new regime. Which industries are positioned to take advantage of the change in political climate? For companies considering business acquisitions, it’s a question worth pondering because your acquisition strategy should always be focused where market demand is strong.

Here are a few sectors to watch. Healthcare is almost certainly going to experience quite a shakeup, with significant growth in some areas. Green energy could be in for a substantial infusion of government funds.  If there’s increased investment in infrastructure such as rail and road, opportunities may grow for capital equipment. Generally, companies that directly serve government could do well such as those that supply large IT systems.

These answers are all speculation of course. My point is, the question itself is worth asking — especially as you think about your own acquisition plans.

Technorati Tags: Acquisition Strategy, business acquisitions, election, M&A, vote