Acquisition Strategy Primer

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2Method Advisory Insight #2

Acquisition Strategies

Accelerating growth


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Take Aways

1. Acquisitions should form part of a companys

overall strategy

2. Poor evaluation and integration planning lead to

the greatest risk of failure in acquisition activities

3. Companies make acquisitions for two reasons:

acquiring resources or business models

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IntroductionThe growth of most businesses can often be limited by internal

and external factors over which the business may have littlecontrol. Organic growth via increasing overall customer base,

increased profit margin per customer, new sales or market seg-

ments can be incredibly difficult to achieve.

Most private businesses never grow beyond a small number

(


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Developing an Acquisition StrategyMany entrepreneurs dismiss the potential of acquisitions be-

cause they lack experience in M&A and believe that we are not

big enough to undertake an acquisition.

We believe that acquisitions can play an important role in com-

panies of all sizes so long as they consider acquisitions as part

of their regular growth and strategic planning process and regu-

larly review whether an acquisition makes sense to achieve spe-

cific goals.

With this approach, an entrepreneur can build a highly success-

ful acquisition strategy by following a logical plan, that acknowl-

edges areas where they may lack experience, and ensures any

potential acquisition opportunity fits within existing growth crite-

ria.

The plan would typically have the following elements:

Education

Acquire knowledge about the acquisition process. As most ac-

quisitions are between 15-50% of a current company size

(measured by headcount or revenue), its likely that this will be

the largest investment the company ever undertakes. A com-

panys management team should access the wide range of in-

formation available on the subject and take advantage of theeducation and insight that can be provided by professional advi-

sors.

Most acquisitions will require the services of an accountant, law-

yer and possibly additional services from an investment bank,

corporate advisor and financial planner. Select advisors that in-

clude transaction work as part of their core competencies.

Also, make use of industry mentoring programs, such as TheExecutive Connection or Entrepreneurs Organization to reach

out to other business managers and owners that have signifi-

cant acquisition experience.

Build Expertise

Build expertise and develop strategic relationships with others

which will bring experience into the process. The management

team should conduct their own skills audit to determine what ac-

quisition skills/capabilities already exist in-house. The acquisi-

tion process will involve tasks such as strategic planning, gap

analysis, market/trend analysis, financial modelling, identifying

potential target companies, building relationships with potential

target companies, managing due diligence, negotiating, post-

merger integration and project management skills.

Education BuildExpertise

DevelopGrowthStrategy

IdentifyAcquisition

Targets

Develop

Evaluation &PurchaseProcess

DevelopIntegration

Plan

ImplementReviewProcess


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If an external M&A consultant is required, they should have spe-

cific knowledge of your industry and experience in transactions

relevant to the size of your company and the target firm. If there

is a significant amount of post-merger integration work to be per-formed, it is wise to have that person employed full-time within

your management team.

It is common to underestimate the amount of time (and money!)

spent on preparing for an acquisition, which may not even be

successful. Once you have in principle agreement with your tar-

get, the time commitment will also increase substantially. For

this reason, it it makes sense to bring additional capacity on-

board to assist with the transaction as your existing manage-

ment team will be unable to carry out their day-to-day duties

and commit the time necessary to an acquisition.

Develop Your Growth Strategy

The starting point for any acquisition must be to focus on the

overall growth strategy of the business. Without taking the time

to develop a growth strategy, an acquisition is nothing morethan an opportunistic purchase - which isnt a strategy - its

growth by luck and hope.

The Ansoff Matrix shows four ways that businesses can grow,

and helps people focus on the risks and tasks associated with

each alternative.

It provides a quick and simple way of thinking about growth.

Market Penetration

A market penetration marketing strategy is very much about

business as usual. The business is focusing on markets and

products it knows well. It is likely to have good information on

competitors and on customer needs. It is unlikely, therefore,

that this strategy will require acquisitions to fuel growth.

MarketPenetration

(sales to existing

markets of existingproducts and services)

Diversification(sales to new marketsof new products and

services)

MarketDevelopment

(sales to new marketsof existing products

and services)

ProductDevelopment

(sales to existing mar-

kets of new productsand services)

Markets&Customers

Existing

New

Products & Services

Existing New

Ansoff Matrix


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Market Development

The product remains the same, but it is marketed to a new audi-

ence. Exporting the product or marketing it in a new region, for

example, may require accessing new distribution channels

which could warrant an acquisition strategy.

Product Development

The business aims to introduce new products into existing mar-

kets. This strategy may require the development of new compe-

tencies and requires the business to develop modified products

which can appeal to existing markets. This approach may war-

rant acquiring external skills, capacity or technologies to acceler-

ate the product development process.

Diversification

The business markets completely new products to new

customers. There are two types of diversification, related andunrelated diversification. Related diversification means that thebusiness remains in a market or industry with which it is famil-iar.

This is an inherently more risky strategy because the business

is moving into markets in which it has little or no experience.

This may be a strong candidate for using an acquisition to

achieve diversification.

With each of these growth options, the company has a choice

to pursue the option organically or accelerate the growth strat-

egy through an acquisition.

Identify Acquisition Targets

Acquisition selection criteria should be established that enable

the business to achieve its growth strategy. Criteria may include

geography, product and market characteristics, company cul-

ture, profitability or unique access to skills, capabilities or intel-

lectual property.

Once the selection criteria have been established, a list of po-

tential targets can be developed and prioritized.

Evaluation

When acquisitions fail, it is generally caused by the acquiring

company failing to objectively and systematically work through

an evaluation framework. In many cases the acquirer does not

know (or loses sight of) what they are buying.

At a minimum, the evaluation process should question:

How committed is the seller?

Exactly what is the benefit expected from the acquisition?

Will the acquisition be integrate into our existing business or

maintained separately?


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Are valuation and deal terms likely to be agreed?

Can we verify key information and articulate the inherent risks

with this acquisition?

What timescale and activities will be required for post-

acquisition integration

Develop An Integration Plan

Once the acquisition gets the green light an integration plan

should be executed that protects existing customer relation-

ships and revenue and communicates the changes to staff, cus-

tomers, suppliers and partners.

Implement a Review Process

A review of the acquisition is an important step in building corpo-

rate know-how, refining acquisition and growth strategies and

improving the probability of success for future transactions.

How Can Method Advisory Help?

Method Advisory specialises in providing transaction assistance

to mid market technology companies. We can assist with

growth strategy, acquisition selection criteria, target identifica-

tion and deal negotiation.

Typically, our engagements are when our client knows they

have a growth/capability gap, are not sure about who they

should target or what the potential synergies would be from an

acquisition.

We use a very discrete (and sometimes anonymous) approach

to identifying and evaluating potential targets.

The total time required to run an acquisition process varies

greatly, but the following is indicative:

Action Weeks Parties

Establish strategic rationale for acquisition 2 Joint

Establish acquisition criteria 4 Joint

Research and map prospective targets 5 Method Advisory

Validate target list 5 Method Advisory

Initial approach to targets 9 Method Advisory

Initial meeting with targets 12 Method Advisory

Qualify targets 12 Joint

Issue offer 14+ Joint

Negotiate offer 16+ Joint

Complete acquisition 16+ Joint


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If you would like to discuss your acquisition strategy, we would

love to hear from you. You can reach us by emailing

[email protected] or visiting www.methodadvisory.com

for more information.

Method Advisory Pty Ltd 2013

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Acquisition Strategy Primer