My goal with this Blog is to share some of the insights that I have gained during my corporate career that will help an Investment Banker and their client as they prepare to engage with a Strategic Buyer.
Having worked in Corporate America for over 30 years and led two different Corporate M&A Teams to the successful completion of 15 strategic acquisitions, I have unique insights into how a Strategic Buyer thinks. Having now worked on the other side of the M&A process as an Investment Banker, I can assure you that Strategic Buyers have very specific ways in how they go about their M&A process.
The standard definition of a Strategic Buyer is spot on. As a Strategic Buyer, we were almost always
operating in the same industry as the Seller. Our corporate strategy called for "external growth" to
complement our "internal growth". As the Corporate M&A Team our goal was to find acquisition
targets whose products and services aligned with our corporate strategy and produced "synergies". Our
annual performance evaluation and our annual bonus was based upon how well we identified targets
and how successful we were in completing transactions.
The Targeting Process:
Part of our job as the internal Corporate M&A Team was to create and maintain the Acquisition Target Maps (ATM's) for each product family in our portfolio and update them on a regular basis. We had meetings with upper management to determine which targets were best suited to meet our strategic goals. During these same meetings, we asked for approvals to make "soft-contact' and determine the targets attitude towards being acquired.
Over time, we analyzed 100+ target companies to find and acquire 15 companies. We knew what we were looking for and could very quickly evaluate and determine our level of interest when approached by an Investment Banker with a client going to market. We rarely strayed from our pre-determined targeting approach.
We preferred that a Seller hire a banker to help them prepare for due diligence and navigate thru the process. The Sellers were normally highly educated electrical engineers with little to no knowledge of the M&A process. Even if we had approached them directly, we advised them to hire an Investment Banker. We learned this the hard way and found that the process went much smoother with an Investment Banker in the middle.
Yes, we would pay a higher price for a targeted company with deep synergies that was involved in an auction process. Because of the ATMs we knew what we wanted and most of the targets had been preapproved by upper management. We went into the process with the attitude of winning. We believed that the target was more valuable to us than other bidders. Developing a good relationship with the Seller's Investment Banker was important when it came down to the final bid day.
We did prepare and utilize DCF Models and Accretive/Dilutive Financial Models to help us place a value on a target. We first valued the target using a "stand alone" approach and then calculated our synergies separately. We did not like to give away our synergies in the transaction price. However, for the right target, we were willing to pay for what we wanted.
We always acquired 100% of the shares at closing. We were blessed to have an excess of cash from our manufacturing operations and our strategy called for investing in "external growth" using this cash. In certain cases, we would use stock and/or warrants to sweeten the deal, especially if it helped the seller with his tax implications.
Executive Management always insisted that we include a detailed Integration Plan during the review process. Again, we learned this the hard way as we had basically destroyed a small acquisition by forcing it to be integrated with the mothership too quickly. They represented one page in a massive product catalog and quickly lost their entrepreneurial spirit. We should have left them as a stand-alone. They were successful prior to the acquisition for a reason.
The quality of the Management Team below the owner was extremely important to us. We assumed the owner would take his money and disappear after a short period of time regardless of what he told us. Could the remaining team run the company, or did we need to insert management from our side? The Integration Plan was just as important to us as the Acquisition Process itself.
We relied heavily on "Pay to Stay" programs as a carrot to key employees to stay for 2-3 years. We used a cash or stock bonus type of approach and asked them to sign the Pay to Stay document. We also knew that the acquisition could hold exciting opportunities for all employees. Being part of a larger organization with additional resources also created career opportunities that did not exist preacquisition. We normally provided improvements in health benefits, vacation plans, and 401k matching.
We always started with a conservative bid. We knew thru experience that the Investment Banker would coach us upwards as needed to stay in the game. We also had internal approvals that had to be obtained from multiple stakeholders each time we improved our price and/or terms.
We always tried to get a Management Meeting as soon as possible to take a closer look at what we were buying and how high we could bid. We were known to try and circumvent the process even before issuing an IOI Letter. On the positive side, we did not issue IOI Letters unless we were serious and had already completed several approvals internally. If we were in play…. we were there to win.
Due Diligence was a long and tiring process. We always brought in outside auditors to complement our internal audit group for the financial review. The audit outcome was the outcome…black and white…. whatever the auditors said that was it. Creative bookkeeping and taxes can sour a deal quickly, even something as simple as state sales tax exposure. We passed on several deals based upon the results of the financial audit.
During this financial audit period by the auditors, the M&A Team was working to confirm the synergies via meetings with management and key employees for hours on end. A Seller should be prepared for very specific questions from people that have years of experience in their markets. We brought in our best for this review because they would be the ones advising our management with a "go / no-go" decision.
Beyond the financial measures, we looked hard at the Sellers KPI's (Key Performance Indicators). Was management looking at the right metrics to measure their performance? The KPI's were normally measuring things like Safety, Quality, Inventory, On-Time Delivery, etc. We absolutely did not want to get stuck with a field quality issue or a large E&O inventory write-off. Environmental was another area that we looked at to determine if there was ground contamination caused by the production process.
We were absolutely committed to the NDA documents. The M&A Team would be reminded multiple times during the process about our responsibilities. It was as much for our benefit as the Sellers. We did not want our participation in the deal to be known in the market until we announced it after closing. We had one young salesman have his employment terminated because he did not seem to understand this concept.
We used the terms "Back Office Synergies" and "Top Line Synergies". We actually had a worksheet listing each of the potential synergies with a calculation of the potential value. We kept this worksheet in our back pocket and did not share it with the Seller or the Investment Banker.
"Back Office Synergies" encompassed non-customer facing functions and were normally calculated using things like headcount reductions, purchasing synergies, and outside service elimination. There is in fact a risk of job loss with a Strategic Buyer. Departments like HR, Accounting, Customer Service, and IT are examples. As a Strategic Buyer we would consolidate these functions to our HQ or Divisional locations.
"Top Line Synergies" were about creating incremental sales with access to new products or markets. We had product gaps that could be filled quicker thru an acquisition than internal development. We would say things like: new product lines within the same industry, new geographical markets, and new channels of distribution. We also said things like: Cross Selling - taking the sellers products thru our channels to market. These types of synergies would provide increased opportunities for sales, marketing, and product development employees. Many times, we actually added employees in the customer facing departments.
In order to be successful in dealing with a Strategic Buyer, listen to the questions they are asking. What
is important to them? Understand what they are looking for and how your client fits with their strategic
growth plans. What are the synergies they are trying to calculate? Whether it be product roadmaps,
technology, customer access, geographical expansion or vendor access….they are involved in the
process for a reason. Find out what that reason is and position your client to its strengths.
Posted by Dennis Wells