For many boards, of public companies in particular, a strategic imperative is finding acquisitions. This is a very important avenue for company growth. While many have the same intent, how they go about it is highly variable, and some companies are likely to be losing value and missing opportunities with acquisitions because of weaknesses in how they find companies to acquie.
Over the last 12 months I’ve spoken to different Chairman, directors and CEOs about how they go about finding acquisitions and have put together some key points to draw the collective experience together and extract ways to improve.
The starting point in searching for acquisitions is usually shaped by a company’s reasons for looking. These reasons fall into two main camps:
1. A strategy: For one chairman the business rationale for acquisitions was to gain an entry point into a new and bigger market. For another CEO the main prize was adding a new service line to purchased companies to lift the value of acquired companies after purchase. In both these cases there is a preconceived strategy which the acquisitions are part of fulfilling.
2. Opportunistic: In other companies they are more open-minded. Some companies simply keep an eye out for anything being sold that may be of value. One director and his board said they spent a lot of time closely looking at an acquisition because it came up, and then they tried to fit a plan around it.
With acquisitions in number one above, there’s likely to be set criteria in what they are looking for in an acquisition: a company of certain size, in certain markets, soft variables such as management’s commitment to the business; attributes that fit what’s required for the business rationale.
There are three main ways companies then go about finding companies which fit their criteria.
1. Database building: One chairman mentioned how he’d hired someone to build a database by trawling through lists online and company profiles for companies that might suit. Then they approach companies to have a closer look at ones on the database.
2. Contacts and social networks: Others mentioned how they had hired a merchant bank able to find acquisitions because they had existing databases, contacts and social networks.
3. Public announcements to attract to sellers: Others again, in public statements to the press or industry purposely mention they are on the look out for acquisitions, and then selling firms approach them.
With opportunistic acquisitions the process is more haphazard. Selling companies may approach and want to be bought, they may be noticed in the media, or word of mouth may bring an acquisition target to the table.
Each of these different processes of finding acquisitions have downstream ramifications in both the eventual success of the search and in the value generated by the acquisition post purchase.
One example is with purchase leverage. This is an account from a CEO highly experienced in acquisitions showing what purchase leverage is. He said, “We were selling a company and the merchant bank lined up ten buyers. All the offers except one were close, around the $200 million mark, and one offer was $300 million. The merchant bank went back to the other buyers and told them the buying range is at $300 million now. You have to be up there or you’re out. One company came up. Then we had the two companies bid and the company that came up ended up buying for over $300 million.”
His point is that by having a larger number of buyers the price obtained by the selling firm is often far greater. That leverage principal also works in reverse.
The greater number of prospects you have to buy, then the better the bargain you can get in purchasing a company meeting your strategic objectives or that presents as an opportunity. You can trade off one seller against another that’s more willing to meet what you want (usually the price you want).
The larger point is how do you get the fullest set of appropriate acquisitions targets. Apart from the leverage, there may be acquisition targets that your search processes simply don’t pick up. How many of the actual companies in the population meeting the objectives or qualifying as a major opportunity do you actually find with current methodologies?
This quesiton refers to the validity of the search methodology. In terms of efficiency of the search methodology you could also add: how fast and efficient are the processes – as often companies look at finding acquisitions end out doing so for a long time, years in some cases or as an ongoing process.
From a professional researcher’s point of view there are holes in each of the current main ways of finding acquisitions in both the validity and efficiency of methodologies.
Let’s start with database methods. The only way they can be robust is if the databases contain most of the same criteria as the strategic criteria, which is highly unlikely as often the criteria include things not in the public domain that are only obtainable by talking with people. The databases also must contain most of the companies in the population being looked into. Considering there are 1.35 million companies in New Zealand and Australia, in most cases the database method just won’t stack up, it’s a few needles from the haystack.
With reliance on social contacts, this has potential to be far more valid and efficient. By asking knowledgeable people which companies meet a criteria you achieve two things. One, you can cover factors which are often strategically vital but not in databases. Two, you can also get an unusual type of mathematical efficiency.
When you ask someone who has a birds eye view of an industry about their own company or look at one company you get a sample of one. When you ask them about other companies they know of – you get a sample of all the companies the person answering on knows in the industry. Most of us know many companies in our own industry, and we often know a depth detail that’s not public knowledge. This normally has a 10:1 efficiency per respondent.
Where this method falls down is it’s only as good as the industry depth and geographic width of the social network of the person conducting the search. This will dictate the rigor of the sample that contributes to building the list of appropriate companies within the population. Other issues are whether it’s an ongoing or one-off search, as things can change quickly, and methods for ranking priority targets.
The third major current method, apart from opportunism, is using public announcements. From a research validity viewpoint this is the weakest methodology. It can only attract those who are aware of announcements, first and foremost. This is called a double-jeopardy effect in social sciences research.
In other words, you won’t necessarily attract who you want to. You get those only aware of the announcement. Secondly, this approach is most likely to attract those really wanting to sell, not all those who might be great acquisitions and might sell if approached the right way. In one way it is a stronger approach to have the seller approach the buyer, the selling is offering to sell. But in terms of finding the right acquisitions and a long list of the right potential companies to buy, it is particularly weak.
In summary, there’s a plethora of issues in how companies find acqusitions currently. With better methodological approaches there could be sigificantly improved validity and effeciency, with associated improvements in final results from acqusitions. This represents a signifcant opportunity.