Over and over on this blog, I have strongly advocated external growth to complement organic growth.  Today the largest 500 non-financial American firms have nearly $1 Trillion in cash and short-term investments on their balance sheets.  That’s Trillion with a ‘T’! This represents roughly 9.8% of their assets.  What does that tell me?  Companies are continuing to hoard cash.

I believe this accumulation of cash will continue for some time because credit still remains scarce, CEOs are anxious about economic pressures and companies are unsure where government regulations are headed.  Given all of this, strategic buyers have a unique window of opportunity for the next 12-16 months to make bold moves.  My philosophy remains “If Not Now, When?”. You’ve seen us say it before.  I’m convinced that sound companies with strong balance sheets, capable management, and a solid plan for growth have an unprecedented opportunity to make strategic acquisitions.

Technorati Tags: Acquisition Strategy, acquisitions, Capstone, cash, David Braun, External Growth, M & A News Acquisition Strategy, M&A, m-and-a, 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

Here’s one principle that Capstone lives by in its work with growing clients. Before you go buying someone else’s company, be sure you fully understand your own. This requires asking a few simple but powerful questions, such as: “What is your core competency?”

Companies, like people, often have mistaken ideas about where they truly excel. And like people, they sometimes need an outsider to shake off their illusions and get clear about the reality. So when you go in search of your core competency, follow some simple guidelines:

• Don’t trust your own assumptions
• Look at your company from functional angles
• See where your resources are concentrated
• See where your successes are concentrated
• Ask informed and intelligent outsiders

Here are some specific tactics that can help you focus on your core competencies. Review the key functions of your company – operations, marketing, sales, finance, management – and ask yourself which is the strongest and which the weakest. If you have a superb manufacturing plant staffed by the best in the business, but your sales team is struggling and your marketing strategy gathering dust, it’s pretty obvious where your strength lies. 

Another tactic is to view your firm in a competitive context: What do you do differently and better than your nearest competitors? What do clients seek you out for? Why do they stay? Is it something about the product itself, or a quality of your service and how you deliver? Or is it a perceived value in your brand, a matter of historic reputation or newcomer’s cool? 

Knowing your strengths is one of the most critical factors in building your growth strategy. For one thing, you will be looking to leverage those strengths as you expand rather than taking them for granted. Then you will seek to balance them by finding external resources that compensate your weaknesses. Finally, your strengths represent a marketing asset when you come to approach a potential acquisition. As all M&A players learn, the strategic buyer actually has to sell himself. Your strengths are part of the story that will make a seller take interest in a potential union.

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

Why do stock market investors sell when prices collapse and buy when prices soar? Why do real estate owners display the same irrational behavior? The math is hardly difficult. It’s better to buy when valuations are low and sell when they are high. Yet human nature seems to require that we run with the market cycles instead of against them.

It’s easy to see how that plays out in M&A. The other day, one of our clients said to me: “We’re retrenching like everyone else”. Well that’s honest, but hardly inspiring. My response is: If you have a plan for growth, stick to it, irrespective of the market. After all, a good financial advisor would say no less about your plan for retirement. Stand by your strategy through good times and bad.

I understand the real world of company dynamics makes this easier said than done. In any organization, there will be a handful of people with the vision to see that M&A is often the fastest track to growth. But in times of economic anxiety, they will be told that their ideas are far too risky, that all we should be doing is focusing on cutting costs and getting by. 

In reality, the long-term winners will be those that are seizing on the extraordinary opportunities this current period is producing. They will be more proactive than ever, not just looking for bargains but seeing the chance to expand in existing markets and penetrate new ones by joining force with other players who are now more motivated than ever to contemplate some form of union.

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

Officially, there’s been a drop of some 27% in M&A deals in the past year. In reality, this number is skewed by the large deals. In the markets where Capstone plays — mostly deals under $1 billion — there is a drop in activity but not to this catastrophic degree.

There are still plenty of healthy companies out there looking for ways to reposition themselves. And they are eager to take advantage of the lower valuations the changed environment has brought. Those that have fire in the belly are taking action to grow.

The mode of growth has shifted, however.  With the debt world crumbling and the flow of private equity almost dried up, creative executives are looking at alternatives to the traditional acquisition. Minority ownerships, joint ventures, strategic alliances… Reviewing multiple paths to external growth is part of the Capstone strategic process, so it’s interesting to see this trend emerging in the market at large.

One force that’s noticeable is the pressure from end-customers for consolidated solutions. They are increasingly impatient with dealing with multiple vendors. This creates the opportunity to become the preferred solution-provider, assuming you can team up with one or several other partners to offer a one-stop solution to the customer. 

It often takes vision at the CEO level to see these larger opportunities. I have been dealing with a couple of clients recently that have two or three successful lines of business running. There is no obvious problem with any of these lines, but the question comes up: “How do we rise to the next level?” That requires looking across and beyond the current lines to see what is possible through creative union with other players.

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

Here’s a recent exchange between the two principals in an acquisition we are advising on. Seller to buyer, “So what’s your exit strategy?”  An odd moment in the circumstances. Usually, the last thing M&A buyers have on their minds is offloading the newly combined entity. Seems a bit like talking about divorce at a wedding.

In fact, the seller was revealing a rare foresightedness. Wise company owners keep a constant eye on the exit, and have plans for getting out even as they appear to be getting deeper in. 

Few owners I have seen actually exemplify this wisdom. They are too engrossed in the demands of growth, worrying about the next contract, the new hire, the late delivery… They are staring at the ground three feet ahead of them, not the far horizon. So when do they actually get to consider selling? When disaster strikes. A major account is canceled. A new competitor surpasses their technology. Three of their key people leave. 

Well no surprise, that’s hardly the optimum time to sell! Do you really want to put your company on the market when it’s worth the least? Better to think ahead while times are good. Having an exit strategy doesn’t oblige you to leave. Planning how to attract a buyer doesn’t compel you to hang a “for sale” sign on the door. 

You should not only have an exit strategy, you should keep revisiting and updating it as the market changes.  That way, you’ll be positioned to take advantage of your company’s strengths, rather than risk falling victim to its weaknesses.

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