Preparing To Make An Acquisition (Print)

Preparing to Make an Acquisition

June 2, 2009

Preparing to Make an Acquisition

Given the current economic conditions, you may be facing an opportunity to acquire a long-time competitor who is now struggling. Acquisition might open the door to a new market, or it might mean the addition or expansion of a line of complementary products.

Some acquisitions, like marriages, are made inheaven. Such a union of two companies can boost revenues, cut costs and increase market share. Other deals – also like some marriages –are made in hell. There are turf battles, management deadlocks and employee morale issues that can easily undermine the entire deal. The challenge in making an acquisition work is to define and then stick to a solid process – from target selection to approaching your commercial bank for financing.  Assuming you have decided to embark on an acquisition strategy, how do you identify an appropriate target?

 

The “right” opportunity might mean gaining access to a cutting-edge technology, or bailing out a financial or management distress situation.  The result may be reduced costs due to increased synergies, or positioning the new organization for growth. When selecting a target, one or more of the following outcomes should be expected:

 

1. The deal will lower your overall costs.

 

2. You will be able to increase the combined company’s market power by spreading the

stronger brand name over a wider product or service base.

 

3. The acquisition will change the competitive landscape.  Once you have eyed your target, serious due diligence begins. Let’s look at some potential pitfalls that would need to be addressed:

 

1. Compelling strategic rationale. Make sure you can answer the question, “Why am I doing this?”

 

2. SWOT analysis. Have you identified the company’s core strengths, market opportunities, and any potential threats?

 

3. Customer satisfaction. What are the customers of the target company buying, and

what do they define as satisfaction?

 

4. The “people” factor. If you are not paying attention to employees and what this means to them, you can kiss a great outcome goodbye.  Now, when it comes to actually financing the acquisition, you’ll no doubt talk to your commercial banker. At Fidelity Bank, we consider ourselves an impartial third party in helping our clients in acquisition mode, beginning at the exploration stage. Let’s take a look at some critical issues we like to keep in mind when working with a client who is seeking financing for an acquisition:

 

1. Payback. Before making that critical “go, no-go” decision, you need to measure

objectively the payback period on the purchase price. 

 

2. Not So Sudden Impact. Set realistic expectations. Do not underestimate the challenge of achieving synergy and savings. 

 

3. Consider Collateral. Remember, however, that advance rates on many asset types have

decreased during this economic downturn. 

 

4. Structurally Sound. The important thing here is to keep in mind that all the pieces of the deal have to cash flow, especially with bank financing playing a smaller role in the overall structure of acquisitions.  Showing your commercial banker that you have considered each of these last four areas and have addressed all the issues covered above

will contribute significantly to getting the deal done, quickly and efficiently.

First appearing in the Minnesota Business Journal 4/19/09

Given the current economic conditions, you may be facing an opportunity to acquire a long-time competitor who is now struggling. Acquisition might open the door to a new market, or it might mean the addition or expansion of a line of complementary products. Some acquisitions, like marriages, are made in heaven.

Such a union of two companies can boost revenues, cut costs and increase market share. Other deals – also like some marriages – are made in hell. There are turf battles, management deadlocks and employee morale issues that can easily undermine the entire deal.

The challenge in making an acquisition work is to define and then stick to a solid process – from target selection to approaching your commercial bank for financing. Assuming you have decided to embark on an acquisition strategy, how do you identify an appropriate target? The “right” opportunity might mean gaining access to a cutting-edge technology, or bailing out a financial or management distress situation. The result may be reduced costs due to increased synergies, or positioning the new organization for growth. When selecting a target, one or more of the following outcomes should be expected:

1. The deal will lower your overall costs.

2. You will be able to increase the combined company’s market power by spreading the

stronger brand name over a wider product or service base.

3. The acquisition will change the competitive landscape.  Once you have eyed your target, serious due diligence begins. Let’s look at some potential pitfalls that would need to be addressed:

1. Compelling strategic rationale. Make sure you can answer the question, “Why am I doing this?”

2. SWOT analysis. Have you identified the company’s core strengths, market opportunities, and any potential threats?

3. Customer satisfaction. What are the customers of the target company buying, and what do they define as satisfaction?

4. The “people” factor. If you are not paying attention to employees and what this means to them, you can kiss a great outcome goodbye.  Now, when it comes to actually financing the acquisition, you’ll no doubt talk to your commercial banker. At Fidelity Bank, we consider ourselves an impartial third party in helping our clients in acquisition mode, beginning at the exploration stage. Let’s take a look at some critical issues we like to keep in mind when working with a client who is seeking financing for an acquisition:

1. Payback. Before making that critical “go, no-go” decision, you need to measure objectively the payback period on the purchase price.

2. Not So Sudden Impact. Set realistic expectations. Do not underestimate the challenge of achieving synergy and savings.

3. Consider Collateral. Remember, however, that advance rates on many asset types have decreased during this economic downturn.

4. Structurally Sound. The important thing here is to keep in mind that all the pieces of the deal have to cash flow, especially with bank financing playing a smaller role in the overall structure of acquisitions.  Showing your commercial banker that you have considered each of these last four areas and have addressed all the issues covered above will contribute significantly to getting the deal done, quickly and efficiently.

ANTHONY GIZINSKI

Vice President

Fidelity Bank

anthony@fidelitybankmn.com