Every business owner has a favorite reason for not selling. Having heard them all over the years, I have collected a list of my favorite excuses.
#10. I want to continue not going fishing every chance I get.
Some business owners are just having too much fun. They in fact are having so much fun not selling their businesses that they don’t ever want to stop not selling them. It doesn’t take much time to attend get-acquainted meetings arranged by others. In fact, being courted, flattered and wooed becomes addictive. You might even be surprised: “not-for-sale” sellers are acquired all the time by strategic buyers that see more value in their businesses than they do.
And if you’re one of those executives who plays well with others, a surprising number of CEOs turn out to be the former owners of the now-acquired companies they lead.
#9. I am waiting 'til the business peaks again.
Congratulations, but you’re already too late! It will take 6 months to create a selling document and eliminate the tire kickers. It will take another 6 months to negotiate with the first serious buyers and another 6 months to complete negotiations with the final buyer. That adds up to a year and a half. To maximize price you might want to lower the risk to the buyer by accepting a 2-year earnout or a partial stock deal with a 2-year selling restriction. Remember that a positive outlook will drive your earnout or protect your stock position. Now we are talking 3.5 years (very likely at a minimum). Make no mistake, acquirors buy future earnings.
#8. I’m getting ready to get ready.
You’re right. You’re building a longer growth history that should be of value. It’s important to the buyer, especially when you don’t have it. But once you have established that strong sales history, your company’s future will be discounted in some other way: your company’s future always will be discounted on one basis or another. Too often, quite drastically and unexpectedly on the basis of circumstances you never anticipated.
In 2006, a healthy 78 year old owned a Toyota dealership that boasted 20 years’ uninterrupted sales and profit increases. The dealership was managed by a strong professional manager and its prospects were so bright that the owner outright refused an unsolicited offer of $300 million for the company. The dealer was absolutely certain of one thing: the business would be worth even more than that a few years down the road.
Within months of rejecting the $300 million offer for his dealership, the owner experienced heart problems and his professional manager was fired for making “unauthorized withdrawals” from the business. Confronted by these unexpected circumstances, the owner began reevaluating his situation. He decided to reach out to his $300 million suitor the following year.
The buyer was still very interested in acquiring the dealership and serious discussions ensued even as the real estate market silently crumbled and oil traders began to hedge their positions and Bear Stearns collapsed and then Lehman Brothers. Discussions with this single prospective buyer stretched on for a year or more, by which time, gas prices had doubled, auto sales had plummeted (along with the stock markets) and the dealership experienced it first back-to-back monthly losses.
The buyer did not want to insult the seller, and so he made offer for the dealership he once thought was worth $300 million. In the midst of a global recession and a raft of financial crises, the buyer said could not have raised the necessary capital anyway. And so it was that a $300 million Toyota dealership no longer is worth $300 million and very likely never will be.
#7. I don’t know where to better invest the proceeds.
Few can be sure of where to invest their money in these times but one is certain. Were you to sell, no one could possibly convince you to invest the entire proceeds in a medium-sized, privately-held business, even if you were offered the titles of Chairman and CEO. Like you are now.
#6. I’m waiting for the kids’ IQ to improve.
Well, there are lots of people holding out hope on that one. It certainly is most admirable wanting to eventually entrust your retirement to the hands of your children rather than dispassionate pubic company business executives who are expert in the management of millions or billions of dollars in corporate assets.
#5. I can’t spare the time.
It does take a lot of time to manage the sale of a company, especially when the seller is dealing directly with the buyer. As one or more buyers becomes more serious about an acquisition, resulting discussions consume more and more of the seller’s time. As a result, sellers may tend to focus on one buyer at a time, losing the advantage inherent in an auction process in which several prospective buyers compete to acquire the seller while also setting in motion a never-ending pattern of sequential negotiations by ending discussions with one buyer whose interest falters or whose terms disappoint only to enter into discussions with another interested party.
Buyers know that unforeseen circumstances frequently arise (on an annual basis at least) that make every owner think more seriously about selling. By drawing out the get-acquainted process through serial negotiations, the seller increases the odds that unforeseen circumstances will arise to force a sale at an inopportune time while giving the available buyer unexpected leverage in discussions with a seller who may have run out of room to maneuver.
Sellers who are truly time haunted should consider the advantages of undertaking multiple simultaneous discussions. For less time than it takes to talk with one unsolicited suitor, 100 strategic buyers can review the opportunity. From that group, 10 serious buyers likely will emerge, requesting additional information and submitting offers. This process enables sellers to evaluate each suitor’s relative seriousness even as the competitive process ensures that each buyer offers maximum value. Should prices fall short of expectations, sellers will have learned the size of the gap, enabling them to create an appropriate action plan.
Should unforeseen circumstances arise, remember who always wins the auction: the seller.
#4. There are plenty of interested buyers: I get calls all the time…
Most active acquirers maintain a prospect list that they routinely contact and they also tend to re-establish acquaintances during trade shows. To the greatest degree possible, they make every effort to avoid auctions because auctions always drive up the price. If you see no point in hiring an investment banking firm to keep the potential buyer honest because you really have no interest in selling, you may be absolutely right. However, if you think there is even a 1% chance that you will sell, consider this: if there is one thing buyers hate more than unrealistic sellers it is the specter of other overly anxious buyers entering the picture. If you already have taken the first step and met with the buyer and see enough potential for a second step, your next step should be to hire representation to identify 10 to 20 strategic buyers to keep the process honest because the next step probably will be signing a “stand still” agreement.
Be sure to view the cost of representation as acquisition option insurance. For an investment of $35,000 to $50,000, your investment banker will produce a selling document and initial strategic buyer research that likely will save you 6 to 12 months of “getting ready to get ready” time. More importantly, the time savings and the value of an investment banker’s insights and advice likely will increase the odds of hitting the narrow window of an ideal selling opportunity.
Ideal selling windows tend to open for a very short time because of the multitude of variables involved, most of which lie beyond any seller’s reach or control. For example, sellers have no control over interest rates that inevitably have a huge impact on prices that buyers are willing to pay (and afford). As interest rates rise, prospective buyers scale back prices they are willing to pay in order to maintain their return on investment ratios. Buyers begin to disappear from the market altogether as interest rates make acquisitions more and more prohibitive. The fewer buyers in the market, the lower the prices paid. Stock markets also have a major impact on valuations, especially when buyers plan to use stock to complete an acquisition. No one pays a premium with undervalued stock price. Strategic buyers come and go very quickly as do the perfect selling opportunities.
#3. I don’t want to face what it’s not worth.
Value is in the eye of the beholder and the best value is realized when you make sure you’re talking to the right buyers.
Financial buyers use a discounted cash flow model to establish value base upon the cost of capital, a worst case scenario of a 5 to 7 year payback and require every deal to be self-funding. They create added value by exercising greater financial control to improve profitability and expecting, in turn, to identify a strategic buyer willing to pay a crazy price in the next 5 to 10 years.
Strategic buyers use the same discounted cash flow model not to establish value but rather as a negotiation tool to ensure the seller’s expectations remain reasonable. The valuation model they present to the board calculates the return on capital employed while featuring some synergistic benefits between the two companies or some avoidance cost showing the buyer making a killing.
The bottom line is this: you never run into a price problem when the buyer recognizes a greater value than the seller sees. Not every buyer sees the same value but at any point in time, every business is worth a premium to someone.
#2. I’m gonna live forever.
Besides, you’re riding a winning streak, and every gambler’s motto is: “cash-in later.” The plain truth is that few of us will know when we will be called to cash-in.
You don’t want that burden to fall on those left behind. Expecting a widow or children to manage the selling process from scratch, even when assisted by a good attorney, invites disaster. Your heirs will be pegged as “desperate” sellers by every suitor and the longer it takes to close a transaction, the worse things will become.
#1. I’m waiting to lose a few more options: I always do best when I’m under pressure.
If you're market share is slipping, your product line needs updating, key personnel are leaving, key customers are defecting to competitors, revenues and/or profits are declining, and your market is disappearing, what are you waiting for? Do you want to see your business model completely invalidated?
99% of all entrepreneurs hold on too long and sell their businesses 3 to 5 years too late. They postpone the inevitable decision until they find themselves trapped by “must sell” circumstances. Or, on the other hand, the seemingly “right time” to exit suddenly turns into the “wrong time” quite unexpectedly.
Holding on till the last minute must be a “primate thing.” In the 1930s and 1940s, there was a hunter and collector of big game named Frank Buck who created an adventure series called “Bring ‘Em Back Alive.” He captured baboons for zoos with nothing more than two feet of rope, a cider jug and a handful of peanuts. First, he baited the ground with a few peanuts. Then he dropped the rest of the peanuts into the jug. Baboons who found the nuts on the ground always wanted more. As if scripted for a “B” rated comedy, an enterprising baboon would reach down the narrow neck of a staked-down jug to grab just one more morsel. Unable to withdraw a clenched fist full of nuts and unwilling to let the nuts go, the baboon stubbornly sat, caught in a trap of his own making.
While some might consider the analogy unflattering, business owners all too often fall victim to an unwillingness to let go at the appropriate time. Business owners recognize the critical importance of timing even as they admit to postponing the process, perpetuating delays even as they seem powerless to know when to let go and escape the inevitable trap. Sooner or later, the executives recognize the true price of their reticence: Mr. “DeFault” winds up making their estate planning decisions.
The best acquisitions are never “for sale” but they are acquired all the time by buyers who didn’t wait for opportunity to come knocking.
If you don’t want to miss an opportunity, take the initiative and augment your deal-flow with those “not-for-sale” prospects that you know are out there. All it takes is a mastery of buy side acquisition search.
Case Study
The McLean Group's Senior Managing Directors Zane Markowitz and Steve McNaughton first began working for Union Carbide in the 1970s. Executives there had identified an emerging specialty chemicals market: electronics specialty chemicals. At that time, only 19 companies served the entire electronics specialty chemicals market and the largest player’s sales were less than $5 million. Markowitz and McNaughton developed an in-depth report analyzing all the competitors in that market and asked the owners of each company if they would be willing to meet with their client. While none of the owners was actively for sale, six of them were willing to meet on a “get acquainted” basis. Union Carbide acquired the best three of those six companies. Collectively, they helped Union Carbide become the leading supplier of electronics specialty chemicals.
Markowitz and McNaughton’s next Union Carbide assignment was undertaken on behalf of its Automotive Chemicals Group, which sought to expand beyond Prestone Antifreeze. Markowitz and McNaughton called 110 “not-for-sale” automotive chemical companies and regularly re-contacted those they believed constituted the best acquisition search opportunities for their client.
Over the course of the next 18 months, Markowitz and McNaughton called WR Grace several times, receiving the same boilerplate, “fiduciary responsibility” response every time: “Everything is for sale at the right price.” A few months later, an article in The Wall Street Journal reported WR Grace’s cash bind. Markowitz and McNaughton called again. “Well, things have changed a bit here,” said the VP of Corporate Development. Union Carbide moved quickly, acquiring the “not-for-sale” STP from WR Grace before WR Grace actively considered divesting it.
Union Carbide then asked Markowitz and McNaughton to look beyond its original acquisition search criteria and they identified an interesting Baltimore-based firm that did not blend or manufacture automotive chemicals but definitely served the automotive space. Union Carbide declined to pursue this new prospect because, at $7 million in annual revenues, Jiffy Lube was too small. The client fatefully concluded, “It’s just too easy to go to a gas station for those services.” Soon afterward, Union Carbide’s Bhopal tragedy occurred.
In conducting buy side acquisition search, the first steps are rather obvious: identify which business segments or individual companies should be of greater value to your organization than they are to their current owners. Then gather the critical information you require to qualify each prospect. With the right information, you have the ability to clearly identify the most attractive business segments and prioritize your acquisition search efforts by focusing on specific companies.
Expect that the most critical issues to be addressed in buy side acquisition search will require more than Internet answers: this kind of research necessitates direct contact with competitors, customers and, ultimately, the acquisition targets themselves. Such direct, third-party interview-based research often is impossible for a strategic competitor to conduct anonymously so you may need help from a consultant.
You or your buy side acquisition search consultant can build a proprietary database of all companies suiting your acquisition search criteria while also obtaining hard-to-get data on a target’s product line breakdowns, sales and profit, growth rates, markets served (and so forth), enabling you to rank how well individual candidates match your acquisition search criteria.
An acquisition search consultant also should be able to provide insights into owners’ thoughts and concerns vis-à-vis selling their businesses. These are not “yes” or “no” answers but instead involve in-depth discussion with owners to determine what they believe has been missing in past acquisition overtures. And what, aside from price, it would take for the owner to seriously consider sitting down and discussing a sale of the business.
Bottom line: the most important skill in this process is overcoming the owner’s inevitable objections. Next time, we’ll discuss owners' Top 10 objections to selling their companies and offer tips to help you overcome them in your successful buy side acquisition search program.
The path forward in uncertain times begins not with a well-intentioned first step, but rather a clear understanding of where a company stands. Competitive advantages and market positions don’t disappear overnight: they slowly lead a company astray in one little misstep at a time.
The problem usually isn’t the big facts, or the big picture, but rather the little assumptions that derail a firm. No matter how sincerely believed or persuasively argued, faulty little assumptions lead business planning in the wrong direction.
Why risk incorporating faulty assumptions into critical planning when an independent assessment can validate where a company stands competitively?
Proper competitive analysis facilitates both external and internal development activities. When focusing on internal issues, good intelligence identifies areas requiring improvement, enabling executives to prioritize resource allocation accordingly and monitor progress. When analyzing external opportunities (new market opportunities, acquisition options, including “not for sale” sellers, and acquisition due diligence) the right intelligence provides executives confidence that they missed nothing.
Independent competitive analysis services are designed to augment rather than replace your existing strategic research efforts. Everyone has access to the same databases, syndicated studies and Internet research. That’s required just to stay even but those resources guarantee no directional advantage when making multi-million dollar decisions.
Even the best research teams can do little more than weigh information options, decide what seems most relevant, and integrate often times conflicting data into a corporate knowledge base. Over time, such activities tend to embed misperceptions and false assumptions into the corporate mindset, while inevitably transforming them into directional “facts.”
The best competitive intelligence is obtained through primary research. This methodology offers planners and decision makers the ability to establish highly-targeted facts. Knowing these critical bits of information enables corporate development professionals to resolve inconsistencies, assess implications/options, and verify countervailing market forces while addressing their companies’ strengths, weaknesses, opportunities and the threats posed by competing entities.
Business executives’ critical strategic decisions require more than easy-access public information. While the Internet inundates them with right-or-wrong information, just knowing the difference between the two provides the most critical advantage. Gaining this advantage requires direct competitor contact through the very inquiries that are virtually impossible for business executives to undertake internally.
Zane Markowitz and Steve McNaughton pioneered the external approach to decision making by tapping the knowledge of senior executives, vendors, customers, industry experts and government officials to provide business executive clients a comprehensive understanding of what really goes on in their target market(s) today… and what that means for tomorrow.
The most important first step in this process is determining exactly what the client needs to know. Only issue-driven assignments deliver actionable results. Obtaining respondents’ cooperation is no less critical but this plays to our particular strength: the ability to identify and gain the confidence of market players with first-hand knowledge of market particulars, to ask them the right questions, and to engage in logical follow-up.
Our methodology creates a composite market perspective through the eyes of all the parties who shaped it. The process requires deep, intensive inquiry combined with a constant, thorough cross-checking of opinions to identify and resolve all inconsistencies, and to separate fiction from verifiable fact. The end result provides business executives the time to anticipate market realities, confirms directional assumptions and closes nagging information gaps to deliver new confidence that corporate strategies will endure and prosper.
To learn more about how we can support you in shaping your company’s future, email Zane Markowitz (zmarkowitz@mcleanllc.com) or Steve McNaughton (smcnaughton@mcleanllc.com) or give them a call at 703.752.9017.
You can sit by the phone and wait for investment bankers, accountants, lawyers, etc. to call you with the ideal acquisition prospect… or, you can control the process by reversing it. Some “strategic” acquirers think they are doing this by floating their acquisition criteria sheets to the world and then expecting the perfect acquisition to be delivered to them exclusively. And others believe that when their known acquisition target(s) are ready to be acquired, they will be the first to be called.
A really sophisticated and successful acquirer takes a different approach by creating a Relative Acquisition Attractiveness Matrix. If you cannot do this, then you are at risk of missing key and strategic acquisition candidates or of not being able to price an acquisition properly and instead losing it with too low a bid.
Seller auctions orchestrated by good investment banking firms favor the sellers’ bargaining positions. By getting there first and creating your own private buyer auction, you effectively take control of the situation.
Here’s a story that should drive the point home. Years ago, we decided to buy a waterfowl hunting property on the Eastern Shore of Maryland (Chesapeake Bay). By happenstance, we were good friends of the premier and unquestionably best realtor for waterfowl hunting property in that part of the world. He literally knew all the property owners there. He assured us that when a suitable property came up for sale, he would know about it and we’d get a shot at it. Given our own many years successfully conducting Buy-Side acquisition searches for Fortune 1000 companies and their subsidiaries, we suggested that approach to him. He reiterated his commitment to his own process and we could not convince him try our approach.
So we got maps, called game wardens, talked to Department of Natural Resources (DNR) people, etc. and soon determined where the best duck hunting could be found on the Eastern Shore: a certain area in Dorchester County. Then we called the respective landowners and told them what we were looking for. As we suspected, not one of these properties was actively for sale or listed… but more than half of the property owners were more than willing to listen to us and entertain an offer from us. We bought 350 acres of the best duck hunting property on the Eastern Shore within six months. At the closing, the lawyer, who had grown up with the seller and was a good friend said, “Bill, I didn’t know your marsh was for sale?!” Bill responded, “It wasn’t.” End of story.
Great “not-for-sale” companies get acquired all the time by buyers who get there first and who know how to pique potential interest…
If you do not have the expertise or staff to create and run a proactive, strategically-focused Buy-Side Acquisition Search program, we would like to talk with you. We have more experience in Buy-Side Acquisition Search than most Middle Market Investment Banking firms. We would be happy to put that experience to work for you.
Acquisition Options Matrix
Our Proprietary Acquisition Options Matrix clearly shows the alternatives available in terms of size, fit and interest in being acquired. The Options Matrix helps your Board and acquisition team rationalize the price they are willing to pay (or not) vs. the acquisition options available. If you cannot create this for your company, we can.
In conducting competitive analysis:
Get “out into the field.”
Do primary source research.
Seek out expert* opinions.
In so doing, you inevitably will learn a great deal about your competitors, including their:
1. Margins
2. Growth Rates
3. Balance Sheet Information
4. Sales & Marketing Structures
5. Manufacturing Processes
6. Production Output Rates
7. Management Profiles… and Changes
8. Objectives and Strategic Directions
9. Customers’ Opinions concerning Your Company vs. Other Competitors
The information from 1-9 above should enable you to perform a SWOT analysis.
The testimony of experts* is admissible evidence...
When making long-range forecasts on events for which a suitable database does not exist to permit model building or logical extrapolation, few alternatives are left but to solicit informed opinion. Source: Norman Dalkey, The Rand Corporation.
*Experts include a wide variety of individuals, from the CEO on down, and competitors, raw material suppliers, customers, distributors, government agencies, and so forth. Experts, by definition, are knowledgeable about various aspects of your business arena.
Business leaders who remain apprised of the above minimize their risks of being blindsided by competitors or finding themselves unaware of evolving customer behaviors that may guide – or even transform – future strategy.
Posted by
Eric Gins on Fri, Sep 16, 2011 @ 09:02 AM
M&A WHITE PAPER EXECUTIVE SUMMARY
After the substantial consolidation and downsizing caused by the “Peace Dividend” in the 1990s, the Defense Industry was initially unprepared to fight the Global War on Terror following the Terrorist Attacks of 9/11. Establishing the infrastructure needed to fight this asymmetric threat required industry prime contractors to provide comprehensive solutions and technologies in areas such as communications, intelligence collection, data analytics, unmanned systems and counter-IED technologies, among others.
While requirements within the defense industry changed substantially during this period, we did not see any new entrants into the Tier-1 contracting community. Instead, primes such as General Dynamics and Northrop Grumman utilized robust M&A programs to shape their capabilities portfolio to adapt to the evolving requirements of the government customer. The Decade averaged 189 transactions per year with disclosed median valuation multiples of 0.97x LTM revenue.
In the public markets, defense companies traded at a substantial premium to historic levels and to their commercial counterparts. From September 1, 2001 to August 30, 2008, the S&P grew at approximately 2% year over year while the Defense Index grew at approximately 13% year over year. IPO activity in the sector was also very active. There were 55 IPOs from 2000 through 2011YTD – an average of just under five a year. However, close to a quarter of the defense and government contractors’ IPOs this decade were subsequently acquired and taken private as defense primes, suddenly flush with “dry powder,” realized potential for enormously profitable synergies.
Since the beginning of the global recession in 2008, it appears that economic conditions and downward pressures on the US Defense Budget have largely erased the “war premium” the market was factoring into valuations. The sector is now trading at or below historic levels and the IPO activity seen during the beginning and middle of the decade seem to be a thing of the past. Finally, priorities within the sector continue to evolve and segments not directly related to the War on Terror such as cyber-security and healthcare IT have become major growth areas during the 2nd half of the decade.
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Your sales department claims it has a few competitors that have a cost advantage. And you’ve noticed margins and sales are slipping. As CEO, the Board is giving you the seemingly impossible task of quantifying and verifying what the sales department is claiming. How do you benchmark your costs vs. those of your competitors?
You might be surprised how many answers are lying around in the public domain.
Every competitor, large or small, public or private, leaves a public footprint that, when followed, reveals clues to its cost position. The sources vary by any given circumstance. Sometimes, even when identified, those sources can be difficult to interpret and leverage. However, with time and the right resources, and knowing where to look, everything in the public domain is available and much might prove quite useful.
Here are a couple of surprising “open” sources we’ve used:
- The plans to every American plant built along with all modifications and upgrades are filed with a municipal, state or federal authority. Some show equipment lines.
- EPA, USDA, FDA inspection compliance files. Some show process steps.
- Import/Export data.
- In England, even privately-held firms are required to supply sales and profit information (Companies House).
- In Japan, you can obtain quite a bit of useful information from MITI/METI.
More importantly, talk to people outside your firm. By “having a conversation with your marketplace,” you will learn more than you would guess about your cost position.
Be sure to talk to:
- Your customers.—Good ones, those you’ve lost, and those you are worried about losing. This serves as a crucial account vulnerability assessment that determines where and why you might be vulnerable from a price/cost standpoint.
- Your raw material suppliers. Are some of your competitors getting a better deal?
- Your distributors and your competitor(s)’ distributors.
By asking the right people the right questions, you will gain a deeper understanding of how and where your competitor(s) have a cost advantage (raw materials, a more efficient manufacturing process, better terms, better distributors, etc.). The marketplace can tell you a lot. Just ask.
Posted by
Eric Gins on Mon, Aug 22, 2011 @ 04:04 PM
Over the last 5 years, one of the most consistently growing market segments in the US has been the Medical Devices market. Medical devices, designed and manufactured to diagnose and treat healthcare patients worldwide, range from bandages to highly-complex, programmable pacemakers and imaging systems. The US Medical Device industry will generate an estimated $60.2 billion in 2011 revenues, having posted 16.3% average annual growth from 2006 through 2011. The industry is expected to grow at a more moderate 6.4% in the five years through 2016 to an estimated $82.1 billion in 2016 revenues. That growth largely will reflect increasing numbers of aging baby boomers requiring higher levels of medical care and likely spending constraints arising from a growing governmental role in healthcare distribution, cost containment initiatives and regulatory intervention.
The US Medical Device Industry is world‐renown for the technological innovations and high quality that reflect significant R&D investments over time. Leading medical device manufacturers include: Abbott Laboratories, American Medical Systems Holdings, Baxter International, Becton Dickinson, Beckman Coulter, GE Healthcare Technologies, Johnson & Johnson, Medtronic, Roche Holding, Smiths Group, St. Jude Medical, Stryker, Zimmer Holdings and Zoll Medical.
Historically, the US has led the world both in the production and consumption of medical devices. While many industries faced downturns during the 2008/2010 global recession, the US Medical Device industry weathered the storm by posting consistent, continuing growth.
The US Medical Device industry is a global leader given its ability to introduce new, innovative and lifesaving technologies. It is well-positioned for worldwide growth as global populations age and as demand for cutting edge healthcare increases in developed and developing nations alike.
The Future: Challenges Ahead
- The Patient Protection and Affordable Care Act of 2010 (PPACA)
- Potential Patent and Intellectual Property Implications arising from PPACA
- General Cost Containment Initiatives led Government Programs and Private Insurers
- Increasing Regulatory Oversight and Intervention
- Double-Dip Recession?
Selected Recent Transactions
- Stryker Corporation Buys Orthovita, Inc.
- Toshiba Medical Systems Corporation Buys Vital Images, Inc.
- Danaher to Buy Beckman Coulter, Inc.
- Endo Pharmaceuticals Holdings, Inc. Buys American Medical Systems
The above-mentioned selected transactions are representative of opportunities Medical Device companies may leverage given the rapidly-changing landscape of healthcare and medical research. More specifically:
- Stryker’s acquisition of Orthovita exemplifies the means by which a company can fund growth by acquiring new product lines and the ability to enter new markets and cross-sell products into them.
- Toshiba’s acquisition of Vital exemplifies how business integrations may generate efficiencies in existing product and service lines along with the expectation that organic sales will grow and improve overall profitability.
- Danaher’s acquisition of Beckman Coulter reflects the management opportunities implicit in buying new technologies as an efficient means to fund growth while avoiding costly internal development projects that may be too risky, too time-consuming and, ultimately, unproductive.
- Endo Pharmaceutical Holdings’ acquisition of American Medical Systems increases product mix diversification given AMS’s role as leading pelvic-health device provider with a portfolio of branded products and specialty generics that complement Endo’s own product offerings.
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Simple, we were thinking we needed to grow the company and diversify. We faced a gap in our growth goals and we decided we would bridge it via acquisitions. So what happened?
- We eroded shareholder value: The day after Quaker Oats acquired Snapple for $1.7 billion in cash, Quaker’s shares fell 10%. Quaker sold Snapple three years later… for $300 million.
- We got fired: Quaker's chairman and CEO “resign” just about a month after selling Snapple. A Bowne & Co., Inc. study involving companies having undergone mergers & acquisitions found that “338 of the 407 CEOs (83%) left within five years of the merger announcement. By comparison, of the 210 firms that announced but later cancelled acquisitions, only 74 (35%) replaced their CEOs after the acquisition's cancellation.” Other research shows similar results.
- We got sued: Securities Class Action Services reports, “The instance of these M&A class actions has increased eight-fold since 2008, and most of them are meritless attempts at ‘easy money.’"
- We overpaid: When acquisitions fail, of course you overpaid. When acquisitions succeed, no one remembers the price.
- The synergies were not there: We overestimated this. There were some manufacturing synergies but less than expected in sales and marketing. We didn’t do enough commercial due diligence.
- Post-acquisition integration did not go well: We put off addressing sensitive issues because we thought we could work them out afterwards. Actually, it was during the integration that we realized the synergies were not so great after all.
Acquisitions are an attractive growth strategy for small and large companies alike. This is evident given a significant increase in competition for acquisitions over the past several years that in fact is making it more difficult than ever to find the right company… and, the best company… to acquire.
Of course, there is no absolute guarantee that any strategy of growth through acquisition will be 100% effective. But you can turn the odds of acquisition success in your favor.
The cornerstone of any acquisition program is commitment. You must be prepared to deal with the inevitable frustrations that will crop up during the acquisition process. Without strong corporate commitment at the Board level, you run the serious risk of wasting time and money, and of failing to acquire the right company. Commitment in the context of a proactive strategic acquisition program is more than emotional. Such a program is both time-consuming and expensive, whether you set up an in-house organization or rely on the services of outside acquisition search professionals. It is quite possible that a good acquisition may take two years or more to accomplish. That means two years or more of top-level executive time, legal costs, travel expenses, frustration and exhilaration.
There is a cost to making smart acquisitions. The cost to making dumb ones is far higher…
GE, Cisco, Kellogg, Blackstone Group or your competitor just acquired that “not-for-sale” company that you hoped would be for sale someday. You didn’t even know about it! Never got a shot at it! What happened?
If you need to make strategic acquisitions for your company, your options are simple. You can sit by the phone waiting for that great strategic prospect to come to you. Maybe an investment bank, attorney or CPA will call you representing a good one! Or, you could take control of the acquisition process rather than it controlling you.
When you think about it, the “for-sale” market place can only give you what is in its “for sale” inventory. And odds are what is in its inventory does not fit your strategic acquisition needs.
Also, only looking at “for-sale” companies to fulfill your strategic growth can be dangerous. It makes you susceptible to the “have I got a deal for you” situation where you start rationalizing fit because you’ve been out there for awhile looking for a deal, and frustration is setting in. The Board is beginning to wonder, “Is this guy ever going to do a deal?” “Is he afraid to pull the trigger?” We’ve seen lots of deals come through here!”
So, after you do some research as to what companies might fit your strategic plan, pick up the phone and call them! Based on 40 years of experience, here’s what you’ll find:
- Ten percent are already in active discussions with another buyer.
- Ten percent need growth capital.
- Five percent of the owners have serious reservations about a family member’s ability to assume control.
- Twenty percent of the owners have serious health concerns they won’t discuss.
- Twenty percent would consider some kind of joint venture as a first step.
- Thirty percent are seriously considering retiring over the next couple years but waiting for the economy to improve.
- Thirty percent would be willing to have a “get acquainted” meeting.
- All have been contacted by someone else within the last month.
- Only forty percent have absolutely no interest in considering being acquired.
- Only 1% will ever be officially represented as “for sale.”
If you call the owner of a $5 million to $500 million privately-held company (or a corporate for one of its divisions), here is what will happen: The owner will tell you why he is not interested. When he finishes his “why he’s not for sale speech,” it is your turn! Do you know what to say? It’s a game. In reality he is “kicking your tires.” Asking you to convince him why he should be interested. Be ready with a compelling answer that will create enough interest to have a “get to know each other” meeting. Making strategic acquisitions is highly competitive. If a given company fits your strategy, you do not have much choice but to start a dialog. Or, you can sit by the phone and wait for him to call you…