What are the proper reasons for a successful acquisition!
4.10.2011Company: Amcham
The article author: Ondřej Štěpánek, M&A Manager, RSM TACOMA Corporate Finance | There are a number of particular reasons and strategies leading to the execution of an acquisition, but only a few of them give the purchaser a high probability of creating the expected value which, however, should be the key condition to bear in mind when buying a company. Unfortunately, there is no general method to guide us in executing a successful acquisition which brings value. Nevertheless, the particular reasons for the interest in a transaction of this type have to be specified at the beginning. The specification is, however, often difficult and unclear, so we definitely recommend using the services of qualified consultants who have a wealth of experience with these transactions.
The RSM TACOMA Corporate Finance team are highly experienced in company acquisitions and receive up-to-the-minute information in this area as a result of their contacts with investors and sellers on a daily basis. Last year, we succeeded in completing many transactions which we prepared for our clients and helped them obtain most of the prerequisites for a successful acquisition which brings value to the purchaser.
We know from our experience that investors adopt a very mixed approach regarding the specification of the purpose of an acquisition. Some of them put a lot of emphasis on the exact and sufficiently concrete specification of the purpose of the acquisition, while in other cases the identification is very vague or non-existent. There are many practical examples showing that an incorrect specification of the reasons or their absence leads to the elimination of the positive impact of the acquisition.
In principle, we have identified five basic strategies which, on the basis of our experience, create significant opportunities for investors to achieve positive value:
- Increase the efficiency of the target company
- Remove excess capacity from the industry
- Ensure the conditions necessary for entering the market
- Obtain technologies and skills
- Acquire the future market leaders
If the interest in the acquisition of the company is not based on one of the above-mentioned strategies, there is a substantial risk that the acquisition will not bring the expected value to the purchaser.
Increase the efficiency of the target company
This is the most frequently applied strategy and is used mainly among private equity investors. Basically, the strategy lies in the acquisition of the target company in order to increase its profitability by means of cost reduction, revenue growth acceleration and a better profit margin. This is a strategy more suitable for companies with a low profit margin.
Remove additional capacity from the industry
The maturity of an industry is often reflected in excess capacity. Companies which are active in a particular industry are constantly seeking opportunities for the more effective use of their capacities, enhanced productivity and production growth. In the meantime, new companies enter the industry, which leads to a further increase in total production. Consequently, the industry generates a supply which exceeds the contemporary demand in the market. However, none of the companies operating in the industry close any of their production plants voluntarily. In the event of a merger of the companies, which is one of the forms that acquisitions take, the non-profitable capacity is easier to identify. In selected industries, the excess capacity is reflected not only in production, but also in other activities regarding, for example, the capacity of the sellers.
Ensure the conditions necessary for entering the market
This strategy is mainly used in smaller businesses providing innovative products, which, however, are not skilled enough to place their product in a large market. Because of the size of the companies that are similar to them, it is difficult for them to enter the international market, and at the same time, their negotiating position in relation to big customers is often relatively weak. Joining a bigger entity with an experienced business team and a strong negotiating position gives them the opportunity to accelerate their growth, as well as increase the potential value creation
Obtain technologies and skills
The application of this strategy is usually driven by the opportunity to obtain interesting technologies and skills without having to pay the costs of their development.
Acquire the future market leaders
The last strategy expected to bring value is the acquisition of a target company in the early stages of its product or an entire industry development which has the prospect of becoming a market leader. In this respect, it is necessary to be the first to identify these companies and to do so at the beginning of their development. Having adopted this strategy, the management of the purchaser has to concentrate primarily on the following:
- Execute the acquisition on time, in the early stages of the development.
- Make several similar investments, bearing in mind that some of them might be unsuccessful.
- Support the business that has been acquired with willingness and patience.
It has been already mentioned that there are a number of acquisition strategies, but they rarely bring positive value to the purchaser. It is very important to focus thoroughly on the preparation and use the assistance of professional consultants who concentrate on these transactions and have sufficient experience.
If you are planning to execute an acquisition, do not hesitate to contact us! We will be glad to share our experience with you and help you to make sure that you receive the expected value.
