I have frequently been approached by clients after a deal suddenly fell through — a deal they had been working on for months or even years. For example, I recall a manufacturer of aviation parts that was convinced they had found from the start the “Holy Grail” of acquisition targets. They believed this prospect was the perfect fit for their external growth needs. They cast aside any other candidates and poured all their energy into the pursuit of this one company. After months of positive negotiations, the prospect abruptly got cold feet and backed out. The owner decided he wasn’t ready to sell a business that had been in family hands for multiple generations. The aviation company was left to start the entire process over.

The lesson is clear. Have one reason for making an acquisition, but have many viable prospects. Don’t just have a Plan B — have a Plan C, a Plan D and so on. Create a funnel and fill it with likely prospects.

The concept of the prospect funnel is that you begin by considering a broad sweep of companies (it could be dozens or even hundreds). Gradually, you filter this list through your prospect criteria, eliminating weaker prospects step-by-step. At each stage as you move down the funnel, your research becomes more detailed and your analysis more exacting. Finally, you will identify a handful worth engaging personally, and from these you will select the company or companies with whom you initiate negotiations for a purchase.

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

Recent news indicates that the federal government will “prop up” the major banks if they continue to falter.  This has some worried that these large financial institutions will be “nationalized”.  The government says that this is not the case:

The strong presumption of the Capital Assistance Program is that the banks should remain in private hands.

Simply put, the government is making a minority investment in these banks, and there is a question of how much control the government will have in these institutions.

Similarly, when we suggest to our clients the possibility of a minority investment in a company instead of an outright acquisition, we sometimes receive push-back over the issue of control.  In fact, in two separate meetings over the past month, our clients’ expressed concern that they would “lack control” even though they would have a financial stake in the company.

A minority investment in and of itself does not mean that the majority shareholder has total control over the direction of the company.  In fact, you can own only 1% of the company and still put yourself in the driver’s seat to get the strategic relationship and benefits you want. The issue of control comes down to the way the minority investment (or any deal) is structured.

It is our philosophy to first find the right strategic prospect, win them over and then find a mutually beneficial solution to the deal structure to bring the two companies together.

Concern over control should not stop you from considering minority investment, or any particular form of external growth.

Technorati Tags: Acquisition Strategy, acquisitions, Capstone, John Dearing, M&A, M&A News, mergers, Mergers and Acquisitions, minority investment