I recently had the opportunity to drive over 1,500 miles over a five-day span throughout the southeastern US.  Two things stood out to me during my drive.  One was the number of shuttered motels, empty and fenced-in distribution centers, and vacant storefronts in small towns and strip centers.  All glaring examples of the on-going economic issues facing the country.

The other thing, however, was an equal number of new motels, new and bustling stores and shops, and numerous service and manufacturing businesses obviously enjoying success and growth.  This dichotomy was side-by-side; regional influences and general economic malaise could not account for the differences.

I believe the difference was the planning and foresight of some owners, and the lack of same by others.  Obviously, some owners see these times as an opportunity – they are willing to think ahead and to plan, and to execute upon those plans, while others wither and die as they “wait to be rescued”.  Don’t be like those shuttered motels and fenced-in empty businesses – take the effort to plan ahead and be opportunistic - if not now, when?

Technorati Tags: Acquisition Strategy, acquisitions, Capstone, economy, External Growth, Growth, M&A, M&A News, mergers, Mergers and Acquisitions, road trip, strategy, wes teague

Clients always want to know how  we can quickly understand the perspective of the owner of the acquisition target.  Over the past 15 years focusing on the privately-held, not-for-sale space, we have a 98% success rate getting our clients in meaningful conversations and meetings with companies that are deemed to be a strategic fit.

The reason the Capstone approach is so successful is that it is truly unique – and we continue to hone it every day.  Many clients and prospective clients have experience ‘attacking’ owners with bulk mail and cold calls - which are almost always unsuccessful. Owners on the receiving end of this barrage tell me, “I get calls from people who want to buy my company every day.  I ignore them.”  This is in addition to CEOs who tell me that generic letters go straight into the ‘round file’.

If you were to talk to owners we target, you would hear a much different response.  Usually, it sounds like “I am not sure why I returned your call but something was different about you.  It seemed sincere…you know more about us.  It makes sense.“

You need to have the right data to deem a company attractive.  You need the right information to ‘open the door’ with an owner.  You need to have a well thought-out approach and story for the owner.  Remember, they not only don’t need to sell – they don’t need to talk to you.  Consider how you can alter that dynamic.

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, Capstone, External Growth, Growth, John Dearing, M&A, M&A News, m-and-a, mergers, Mergers and Acquisitions, owner contacts, owners

A story in the news last week caught my eye - U.S. antitrust enforcers are planning to revamp merger guidelines.  This isn’t surprising news - there have been expectations for quite awhile that the Obama administration was going to take a closer look at large corporate mergers.  It also won’t affect the vast majority of you (or our clients) - antitrust enforcement generally only relates to the biggest of the deals (like the potential Kraft - Cadbury transaction mentioned in the article). What stood out to me, though, was at the bottom of the page:

The move to revamp the guidelines… comes as tentative signs emerge that the mergers and acquisitions market is recovering… In the three months from June to August, global M&A rose 29 percent compared to the preceding three months. In the second quarter, M&A was up 15.2 percent compared with the first quarter…

This has been exactly what we have been seeing with our clients in recent months.  Deals are getting done in new ways:  more creative deal structures are being used and more options are on the table.  Deals are viewed as strategic partnerships to make two companies stronger and help them weather the storm together.  Is increased government scrutiny actually an indication that we are finally starting to see clear skies in the distance?

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, Capstone, David Braun, FTC, government oversight, Growth, M&A, M&A News, mergers, Mergers and Acquisitions

PWC released its second quarter report on M&A activity in the industrial products sector.  Two items from the report stood out for me.  First, M&A activity in the second quarter actually rose compared to the first quarter of 2009 (although still down significantly compared to last year).  This could be a sign that some of the fear that has gripped the marketplace is beginning to subside.  Second, the following quote struck me:

Strategic buyers continued to act as the main investors in the majority of deals in all segments of the industrial products industry as financial investors remained on the sidelines because of continued tight credit markets and a lack of liquidity.

Cash continues to be king.  Companies that have cash are using it to snap up weak competition and make strategic moves to strengthen themselves for the future.  They are making small, targeted acquisitions to calibrate their business.

At Capstone, we are continuing to push our clients to be active buyers in this market.  Our mantra remains: “If not now, when?”

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, Capstone, External Growth, Growth, John Dearing, M&A, mergers, Mergers and Acquisitions

Back in December, I noted (and agreed with) one author’s proclamation that in the current economy, the balance of power in M&A has shifted from sellers to buyers.  The main reason:  With the credit market in a crunch, cash is king, and cash-rich companies hold a distinct advantage.

As these survey results show, this trend is continuing.  I believe this is true in the US as well.  Buyers are looking to protect themselves from a sour deal by adding in more escrows and earn-outs, along with more items covered in reps and warranties.  Due diligence has become more thorough.

Good companies are choosing to sit on the sidelines rather than risk a bad deal.  Grade ‘A’ sellers are also waiting for better days, if they can, or aren’t compromising. Cash is king and the king makes the rules.

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

When you’re considering growth through acquisition, it may seem obvious to focus on companies that are actively searching for a buyer. In fact, this is the most common procedure, widely advocated by investment bankers. However, it is an approach that will severely limit your chances of finding the right company.

For-sale companies are often “for sale” for a reason.  Whether the reason is financial difficulty or ownership problems, it can make these targets much less attractive.  Also, with for-sale companies, there are often multiple interested parties (including your competitors), allowing the seller to drive up the price.  This can shift the balance of power to the seller.   Finally, the inventory of for-sale companies can dry up quickly, leaving you with too few options and backing you into the corner of trying to make an inappropriate company fit your one chosen need.

At Capstone, we usually guide our clients to focus on “not-for-sale” candidates. When a company is “not-for-sale”, it simply means it isn’t actively seeking a buyer. If through your search and screening process, you discover a company that could be the right fit for your acquisition criteria, then it should be pursued.

The central point here is that every company is for sale — for the right equation.

“Equation” almost always means more than price. It can include timing, ownership, reputation, vision, location and a host of other factors related to the owner’s values and aspirations.  There’s a lot that goes into putting that equation together.  For now, the point I’d like emphasize is: don’t exclude any company from your acquisition search simply because it isn’t wearing a “for-sale” sign.  If you find a company that you believe is the best candidate to meet your chosen strategic need, then my advice is: go for it.

Pursuing not-for-sale companies holds several significant advantages.  Not-for-sale companies put you in a proactive, rather than a reactive, position, allowing you to choose what you want.  The management team of a not-for-sale company will be actively engaged in the business, not eyeing the exits. Often they will be eager to stay on (if you want them to) after the deal is done.  Another benefit of looking at not-for-sale companies is that you can maintain stealth in the marketplace, allowing you to pursue an acquisition that no one else knows about.  It also lets you avoid the auction process, which often drives good people out, and prices up.

Finally, by including not-for-sale companies in your search, you have significantly expanded your universe of potential acquisition prospects.

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

You could assume that as an M&A expert I’m in the business of acquisitions. But I prefer to say that I’m in the business of external growth. Sometimes, growth is served by taking other routes than acquisition. One of those can be a simple strategic alliance, which can play a useful role in expanding opportunities — within limits.

Suppose you see the need to expand your customer base, but you have hit a ceiling with your current marketing and sales effort. One step you can take is to form an alliance with a partner who is serving the customers you seek with a non-competing product. You can structure the arrangement in countless ways. Perhaps the partner benefits from simply being able to expand his offering; perhaps you pay a commission on sales or leads; perhaps it is more of an exchange, whereby you simultaneously market your partner’s product to your existing customer base.

The appeal, but also the risk, of such an arrangement lies in the absence of equity investment. This means that neither party has an ownership stake in the outcome. Of course the legal contract of the alliance can have everything nailed down beautifully, but there is a significant difference, in terms of energy and commitment, between a legal obligation and a true business commitment.

The strategic alliance tends to the character of a one-night stand, and in fact I advise my clients to restrict such alliances to short-term agreements. I also like to see alliances focused on very specific and limited objectives, such as securing a better network of representatives. With these caveats, the alliance tactic can deliver tangible benefits.

Nevertheless, the question is bound to arise at some point in the relationship: What next? If the alliance falters, the obvious outcome is to withdraw at the end of the contract. But what if it goes well? There may come a time when you will be trying to figure how to get up to the next level, with some kind of equity involvement. I like to address this issue right from the beginning and write into the contract an option for equity purchase if certain conditions or benchmarks are achieved.

Giving the agreement more teeth may take some extra effort at the start of the relationship, but it will open the door to substantially greater benefits in the long term.

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

When we begin work with M&A clients on their Growth Program Review we normally use Michael Porter’s model, the Five-Forces Analysis.  This shows the five key forces acting on a company’s destiny: Competitors, Customers, New Entrants, Substitutes and Suppliers. 

This model invites you to look at the pressures on your business from several key perspectives, and provides a tool both for diagnosis and prescription. What I like is that it pushes you to see beyond competition, where most business owners tend to get fixated. 

I recall a client in the financial software industry whose entire strategy comprised a breathless reaction to what his competitors were doing. If they added a new function to their application, he set his team to work making a better version of the same upgrade. If his competitors broke into a new geographical market, he dispatched his sales team to set up office there. It was the ultimate “me too but me better” approach. Not a very robust recipe for growth. 

The Five Forces model gets you asking a different set of questions, about for example how changes in supply might affect your business, or what barriers face new entrants to the market, or where new technologies might displace your current offering. 

To my mind, by far the most important element in Porter’s model is “Customers” because this is the key to future demand. In fact, my one quarrel with Porter is that he positions this element to one side and places Competition in the center. I usually reconfigure it to make Customers — that is, future demand — the centerpiece of the diagram in place of Competitors.

Possibly the single most important shift in thinking Capstone brings to clients lies exactly here. We pull their attention away from their competition and on to their market. Together, we break the spell of the present and lift our eyes to the future.

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

At Capstone, we talk a lot about “company DNA”. It’s a big focus when we are at the early strategic stage with a new client.  At the outset, we encourage them to ask themselves, “What’s our DNA?”

The company DNA cannot be read off a nicely worded mission statement hanging in your reception area. It is most vividly expressed by what actually happens, day by day, inside those four walls.

As in the human body, your DNA is the aspect of the company that is very, very unlikely to change. IT systems can be replaced. Financials rise and fall. Employees come and go. Procedures get rewritten, product lines are added or removed, marketing strategies get turned upside down. All these are important, but transient, realities of business life. However, there is something about your company that remains stubbornly the same throughout the vicissitudes of the business environment. We’re talking about the underlying character of your firm, in the sense one would speak of an individual’s character. 

If you want to know your company DNA, take a look at these questions:

How are decisions made? By top-down command, or collaboratively? Slowly and ruminatively, or rapidly and instinctively? How are hiring choices arrived at? Strictly on credentials and capabilities, or just as much on personality and team fit? What level of autonomy is given to departments and individuals? How focused is the company on innovation? What value is really placed on customer service? Is the firm more strategically driven, or more opportunistic and reactive? What is the attitude to pricing and discounts? How aggressively do you tend to pursue new business, new technologies, or new talent?

Knowing your company DNA will impact your growth strategy in a couple of ways. First it will help you spot which avenues of growth are most likely to fit the mold and which potential acquisition targets would make good collaborators. Secondly, it will give you useful practice in sizing up those targets themselves. Just as you need to know your own DNA, you will want to know your future partner’s.

Both of you need to take a blood test before a marriage is considered. 

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

I once had a client that made fish products for manufacturers who in turn created packaged delicacies for the end consumer. My client was tempted at one stage to drift into making consumer products themselves. But they had absolutely no experience or competence in this area. It seemed just a step away, but actually there was a gulf of expertise between the two. Fortunately, the client pulled back before embarking on this hazardous path.

In this case the day was saved by asking an important but oft-forgotten question: What are we not?

For companies with a single product or highly focused offering, the question “” poses no difficulty and you can quickly move on. But As an enterprise expands and becomes more complex, this is an issue of critical strategic importance. Rapid success often blinds owners and leads them into areas where they have no business to be. 

Needless to say, just because you are not something today doesn’t mean you cannot become it tomorrow. The important thing is that any move from what you are to what you can be should be conscious and intentional, and not based on a misconception of your starting point.

Here is why. By blurring the boundary between what you are and what you are not, you can deceive yourself about competencies. So when you review the question “What are we not?” here is how to do it. Look at what business you are in, and where your core competencies are. Make a list of “cousins” that surround those core essentials — the business activities and sectors closest to your own. You are now staring at a list of pitfalls — pitfalls that could become opportunities, but only if you proceed with eyes wide open.

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