Your company’s acquisition strategy should form part of a wider corporate strategy.
If the growth you plan to achieve over the next five years is ambitious, or your company intends to enter new markets or offer new services, acquiring another company is one of the best ways to make a head start in these endeavours.
This requires a clear acquisition strategy. Much like your company’s overall corporate strategy, the acquisition strategy should be broken into separate components.
A well developed acquisition strategy will provide you with a reference point any time that you find yourself veering off track – something which is easily done in the search for target companies.
In its interactions with M&A practitioners, DealRoom has found that the acquisition strategy is often a written document that is the first to go into the company’s M&A management software.
1. Mission Statement for Acquisition(s)
Writing a solid mission statement for your acquisitions will provide you with a reference point any time you feel like your objectives have become hazy or a target doesn’t seem like a good fit.
The most successful acquisitions occur when the company knows exactly what it’s looking for before a suitable target even becomes available.
2. Set Parameters for Target Company
The mission statement for acquisitions will inform the parameters of the target company.
For example, if your mission statement shows that you want to acquire a leading company in your industry on the East Coast, it makes no sense looking for companies outside of that geography, even if they do appear attractive at first glance.
Typical parameters include:
- Maximum acquisition price
- Target revenue and income
- Target location(s)
- Market segment of target
- Any other ‘must haves’
3. Set Timelines
Set your company a suitable timeline to achieve its objectives. Although everybody would like to close a deal in 2-3 months, this usually isn’t a realistic timeline for the vast majority of deals.
If you’re looking at companies locally, 12 months may be reasonable. Acquiring suitable targets abroad could take 2-3 years.
Although the timelines set will be reasonably flexible, they’re still important. They allow your company to set its budget for the next year or two, and to place the acquisition within your broader set of corporate goals.
The timeline can be broken into smaller goals such as, for example, 3 months of company search, 3 months of post merger integration, etc.
4. Define Responsibilities
Good acquisition targets won’t land on your desk just because you’ve written an acquisition mission statement.
The next step is to ensure that people are assigned responsibilities for the overall M&A process. This could be one of the company’s directors, a new hire focused on M&A, or a hired consultant such as an attorney or investment banker.
Whoever is assigned responsibility should provide regular feedback – say, weekly or monthly – on suitable targets, progress on potential deals with targets, and the overall state of the market as they see it.
Decide also whether to assign them with useful tools for M&A such as DealRoom’s VDR or S&P’s Capital IQ, to take just two examples.
5. Design a Target Search
The extent of your search will depend on who is in charge.
M&A professionals from outside will tend to have well developed networks and may return with suitable targets relatively quickly. With an internal team, the process is likely to take more time.
Naturally, the number of suitable targets is also a function of how broad the search parameters that you set were.
Depending on those parameters, the search is likely to include:
- Contact with 3rd party M&A companies
- Searches of online M&A databases
- General research of target market
- Searches of industry databases
6. Define an Outreach Strategy
Suppose you’ve found what you believe to be the ideal target company and now you want to make the initial contact; who do you speak with and how do you get through to them?
The sophistication of your approach is a highly important but often overlooked component of an acquisition strategy. Sending emails to a company helpdesk expressing interest in M&A is not suitable.
A good outreach strategy may include any of the following:
- Making contact through third parties (attorney or investment banker makes contact)
- Sending a registered letter in post to relevant decision maker expressing interest
- Making direct contact with decision makers through LinkedIn
- Discreet approaches at industry conferences
This strategy may involve
7. Pre-Negotiation Strategy Meetings
Preparation is key to achieving the most from negotiations with target company owners.
Sit down with your team and discuss your parameters for the deal before beginning negotiations with any target. This should include the maximum you’re willing to pay for the target company, how a deal can be structured, and where funding will be sourced from.
Solid acquisition strategies underpin successful acquisitions. This means setting clear, achievable targets over agreed timelines, and putting a team in place to ensure the targets are met.
DealRoom has worked with hundreds of companies that have done just this.