Actionable Strategic Acquisitions and How to Close Them

Long-term growth plans include investments in a company’s existing business (“core business”). Such investments are also “organic” because they typically do not diversify product line, technology, and end-market segments or access new geographic markets. Still, these investments are strategic because they tend to strengthen competitive position or build manufacturing scale or scope of distribution, which together drive extraordinary organic growth in the core business.

The other type of strategic investment is “inorganic.” These investments involve business combinations such as acquisitions and mergers. Other types of business combination include joint ventures and strategic alliances, which may focus on joint marketing and distribution or manufacturing or technology development.

Acquisitions may entail purchasing a majority (controlling) stake or minority stake in a company. Other business combinations, such as strategic alliances, may not involve equity investments by participating companies. As with investments in the core business, inorganic investment can also help to drive extraordinary growth. For growth companies, these investments may be crucial to a strategic plan.

Business combinations frequently enable strategic diversification of a business. For example, a company that derives much of its revenues and profits from a single regional market (such as the United States) may want to prioritize its search for acquisitions in other regional markets (Latin America or Europe or Asia) that would diversify the sources for its financial results. Additionally, companies may diversify because they see faster or more sustainable long-term growth opportunities outside of their core markets. Other companies may pursue business combinations to bridge the gap between their strategic growth aspirations and the growth they can achieve with confidence through organic investments alone.

In pursuing business combinations, especially acquisitions, strategic investors should recognize that 90% of all target companies are not considering a transaction. Therefore, a successful growth and diversification strategy built at least in part on business combinations must identify the right targets and have a plan for promoting a good faith dialogue about a transaction. Stated another way, ideal acquisition targets must be a “perfect fit” and must also be “actionable.”

What is the right actionable target for a strategic business combination? Regardless of the type of business combination, a strategic investor must be able to identify and value to the extent practical the specific nature of the strategic fits (sometimes referred to as “synergies”) with each target. This is not easy to do from a satellite view. Careful research and analysis of acquisition targets should produce insights for assessing each target’s “fit” and “readiness” to engage in discussions with the buyer. Meaningful insights for prioritizing targets also come hard because information about targets in certain industry sectors is scarce and often contradictory. This is especially the situation with middle market transactions where companies are often privately-owned and not required to make public financial disclosures. So, insights for selecting the right targets for a search frequently depend on first-hand knowledge of an industry and the competitive strengths and weaknesses of companies in the sector.

A rounded view of a target’s strategic fit for a search involves multiple factors from: raw materials supply leverage, through manufacturing efficiency and economies in transportation and logistics, to creative marketing and sales force productivity, and to after-market services and technical support. In each area, a strategic fit may result from the buyer’s capabilities strengthening the seller’s weaknesses, and vice versa. By identifying and evaluating these factors in an objective and rigorous manner, the buyer and seller can effectively establish the business rationale for a deal. That means a deal which makes strategic sense for both parties. Building this business rationale is the key to promoting a transaction with a target company that is not planning a sale. And this is what we mean by an “actionable” transaction.

Finding the right partner and getting them to the point of a good faith negotiation about a transaction is a major milestone in a search. However, much more needs to be accomplished to close the transaction. At out 40th anniversary celebration, we asked our most successful dealmakers of the past few decades to share their wisdom for getting the right deals completed successfully. The following summarizes their experience:

• A successful dealmaker does his homework. He or she understands the buyer's objectives, limitations, and motivations. On the other hand, the dealmaker must develop the same insights regarding the seller.

• The dealmaker must also understand the decision-making process (including participants, their roles, decision rights, time frames, protocols for both the client and the seller teams).

• A successful dealmaker is patient, especially during negotiations. He or she allows the deal to percolate as necessary and does not insist on artificial deadlines.

• A successful dealmaker documents progress as the deal matures. This helps to avoid confusion and misunderstandings between the principals in a transaction. Documentation is a dynamic process that may start with a broad Memorandum of Understanding and transition to a Letter of Intent and then to a Preliminary Agreement.

• A successful dealmaker ensures the due diligence, negotiations and closing process moves along...there should always be clear next steps, milestones, deliverables, and completion dates. Experienced dealmakers know that a delayed deal does not get closed.

• A successful dealmaker does not over-reach in negotiations. He or she is always ready to leave a little money on the table to achieve a closing.

• A successful dealmaker establishes trust and rapport with parties on both sides of a transaction. The seller should feel comfortable in communicating candidly with the buy-side advisor who can then ameliorate differences between buyer and seller.

• The seller may start from a position that the company is not for sale and soften to a weak "maybe" (25% chance of closing). A weak "maybe" can become a strong "maybe" (50% chance of closing) before getting to "yes".

CDI Global will celebrate its 50th anniversary in 2023. The wisdom reflected in the observations from a prior generation of dealmakers has withstood the test of time. It continues to guide our philosophy and approach to successful business combinations.

If you would like more information or to be contacted by CDI Global regarding your next deal, please click here.

By: Jeff Schmidt, Executive Managing Partner, CDI Global