Got an Acquisition Strategy?
By David Reilly
Viant Capital LLC
Last issue’s column, “Orthopedic Market to Continue to Appreciate and Consolidate” (January/February issue), summarized the various factors driving merger-and-acquisition (M&A) activity within the orthopedic market. In the current environment, many orthopedic companies will be looking to augment growth and enhance value through acquisitions. Given the overall failure rate of acquisitions—some estimates are as high as 60%—underscored by some of the recent large impairment charges by some acquisitive companies (eg, Accellent), there are key elements an acquisition strategy should contain when odds of successful acquisitions can be against you.
Approach your acquisition strategy as you would any important operating strategy: Staff the initiative with professionals experienced in M&A, and fund it with an appropriate budget. Appointing only professionals who already have critical responsibilities—chief financial officer, director of marketing, business development manager, etc.—to lead the effort does not reflect a serious commitment. While these and other key executives will be vital in assessing strategic fit, conducting due diligence and preparing for and executing integration plans, engaging an experienced full-time corporate development officer with a staff or an investment bank can be a sound investment.
The success of an acquisition program should be measured by how the program is orchestrated. The time consumed chasing an acquisition candidate involves substantial opportunity cost. It often is true that the best deal is the one that does not close—but only if that one deal is not pursued at the expense of others. A successful program yields a number of attractive acquisition opportunities that simultaneously have been evaluated and pursued whether several or none close. If lucky, perhaps a below-market price can prevail; but even overpaying for an attractive company is nowhere near the potential disaster of underpaying for a company that is not as strategic as expected or integrated as planned.
Know Who You Are
An acquisition strategy needs to be designed in the context of a company’s core competencies and weaknesses, committed resources, competitive landscape and product and technology mix. Most important, the plan needs to be developed in the context of shareholder objectives with an exit strategy in mind. Be realistic when considering risk tolerance and assessing openness to utilizing leverage or outside equity partners. Furthermore, while strategic turnarounds may be acquired at attractive prices, troubled companies almost always are more difficult and expensive to fix than anticipated. Unless you have solid experience in turnarounds, stick to buying good companies.
Know What You Want
A competitive assessment and market position analysis serve as the critical starting point of devising a well-considered acquisition strategy. Proper pre-acquisition preparation clarifies strategy, defines acquisition parameters and establishes purchase constraints (eg, financing, using stock as currency, etc.). Do you want to expand geographically? Acquire new customers or novel technologies? Drive down costs? Expand product mix and increase prominence with key suppliers or customers? Prioritizing objectives will establish acquisition criteria upon which potential targets should be judged, the valuations that can be justified and the integration requirements that must be met. On paper, the program will specify how acquisitions can leverage core competencies and/or bolster existing market positions, technology or operational weaknesses. In practice, the program will produce a thorough yet refined set of business, financial and strategic criteria against which each potential acquisition opportunity can be assessed, both in initial prioritization as well as in refining priorities as targets advance through the process.
Finding What You’re After
Too many acquisitive companies are consumed with evaluating and pursuing opportunities initiated by investment bankers or business brokers or pursuing companies with whom they currently do business. An acquisition program should involve a methodical and systematic evaluation and pursuit of a wide variety of companies that may meet a company’s refined criteria. As with getting past a book’s cover, the quality of a company often cannot be adequately judged until its books and other confidential information are reviewed. As the depth of the evaluative information concerning each target expands, the breadth of the universe narrows, enabling and requiring constant reprioritization. The proactive pursuit of acquisition targets should be supplemented with contacts and ideas from the deal-making community, including investment banks, private equity firms and industry-specific lawyers, accountants and consulting firms. Subsidiaries and product lines of larger companies should not be overlooked, as these may be non-core businesses that the parent would be open to divesting.
In addition to extensive networks of owners, officers and directors of public and private companies by industry across the globe, M&A advisory firms can help to safeguard a company’s acquisition strategy by approaching and qualifying both prioritized targets and deal intermediaries without disclosing a buyer’s identity until an opportunity is sufficiently qualified. This approach also demonstrates sincerity and a commitment to those targets that otherwise might be concerned about opening dialogue with a competitor or industry insider. Fears of competitive espionage or leaks to customers, suppliers or employees often can be a barrier to engaging a potential seller.
Getting What You Want
The approach to negotiating a deal for a desired company largely depends on the constitution and dynamics of the selling shareholder(s). These vary dramatically from companies privately owned by an entrepreneur, family or financial institution to those publicly traded. While shareholder dynamics can vary widely, there are common and predictable patterns of behavior across shareholder type. The sale process, if any, also can influence the optimal approach to landing the deal. Consequently, the acquisition program’s leader should have substantial experience negotiating transactions with various types of owners. For the same reason sellers rarely should interact directly with a buyer concerning matters related to a transaction, the owner or CEO of a buyer likewise should avoid direct negotiations and, instead, preserve valuable degrees of freedom. The corporate development officer or banker will know how best to judge the optimal timing and approach of each step in a transaction process, including properly handling the courting and initial approach phase, when to involve others within the organization, how and when to structure and propose an offer and determining which thresholds to test and to what degree. Consistent interaction with (or silence from) a point person who controls the tempo and consistency of communication within a process is critical to its advancement. An experienced dealmaker increases the odds of preempting an auction process; however, if participating in an auction, an experienced dealmaker will embrace the seller’s advisor, as an accurate assessment regarding certainty of closure can be as valuable to a buyer as price expectations.
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A well-run proactive acquisition strategy is an engineered process that involves evaluating and pursuing multiple priority targets along varying timeframes simultaneously. For successful execution, the corporate development team constantly must anticipate, consider and manage numerous variables. Ultimately, the success of any acquisition will be measured both by the strategic and financial returns that an acquired business yields for a company in the long term while fitting within the corporate culture.
David Reilly is a managing director of Viant Capital LLC, an investment banking firm that specializes in mergers and acquisitions; private placements; and financial advisory services. He runs the firm’s healthcare practice, which has a focus on the orthopedic market. David can be reached at (203) 682-1880 or DReilly@ViantGroup.com.
Author’s Note: Nothing contained in this article is to be considered the rendering of financial, investment or professional advice for specific circumstances. Readers are responsible for obtaining such advice from professional advisors and are encouraged to do so.