Businesses can grow organically, through partnerships and alliances or through acquisition. Getting the right balance of these growth options is a large enough challenge in “normal” times, but in these extraordinary times of instability, value creation has become an ever more challenging ideal.
An acquirer’s job to buy value becomes more difficult by the day. In the food & beverage industry for example, entities in niches such as healthy snacks, distilleries, plant-based foods, quality pet food and craft breweries are trading at ever increasing multiples, thanks to the still-available capital from private equity that competes against corporate strategic acquisitions.
At Groves & Partners, we urge restraint along with a damn-good financial deal model built by people sitting in the same office room as the strategists. Through our 2022 experience working with acquirers’, we urge each of the following:
Think seriously about improved revenue streams for the acquired business. It’s worth strategising and modelling ways to make existing customers stickier, upselling or cross selling additional products, considering ways to improve lead generation and lead conversions for new customers, and considering market expansion to new geographies, new verticals and new customer segments. All these need to be modelled, but so also must be the costs of acquiring those new customers.
Ensure price optimisation and margin expansion: In these inflationary times, businesses are loath to increase price, but at the same time are stuck with cost-plus pricing that takes no account of the value their target customers enjoy in the product. If the product truly does fixes, enhances, or innovates, the customer may well be prepared to pay more to achieve that value – particularly if they are a true target customer. And if demand is truly elastic and price is a race to the bottom, should you then be acquiring that business at all?
Calculate the synergies… and dis-synergies: Revenue synergies can be obtained through product bundling cost selling, access to each other’s markets and the reduction of competition. Likewise, cost synergies are obtained through overhead reduction, market efficiencies, improved purchasing power and the elimination of redundant systems. But don’t over-estimate synergies such as economies of scale and think seriously about dis-synergies.
Budget seriously for post-merger integration. Significant value is lost when this essential process of merging the human beings and systems in the respective entities is forgotten and the best talent flees the sinking, combined ship.
A model isn’t the be all and end all of a successfully merged operation. For example, it is difficult to “quantify” cultural fit or the management teams’ ability to work together. But both the risk of failure and the costs of redress can be quantified, through smart sensitivity and scenario tools.
Finally, we firmly recommend that the model’s results are tracked against actuals. Assign responsible individuals to ensuring that expectations are matched by reality and give them the power to speak up and make changes, even if they ruffle feathers.
Strategic Transactions incorporate deal modelling as an essential part of our value creation buy-side acquisition mandates.
