While the current economic environment and financial market meltdown have most business owners focused on conserving cash, controlling/reducing headcount and holding on for dear life, most of the wealthiest individuals in the world (including Mr. Buffett) will likely tell you that it is in these uncertain times that fortunes are made. Our belief is that this is true for distribution and industrial businesses that have the capital and courage to pursue strategic acquisitions in 2009. Valuations have meaningfully decreased and most of the attractive factors of the distribution marketplace remain – it is a large, diversified and growing market with considerable consolidation potential. A similar situation presented itself after the 2001/2002 slowdown and many distributors benefited handsomely from well-timed, highly strategic acquisitions.
For those that desire to seize upon the current buying opportunity, it is important to focus on how to be a successful acquirer and review M&A best practices. The following is our synopsis of what it takes to execute a winning acquisition strategy:
- Form an M&A Team –This cross-functional team should include experienced individuals from each major function (Finance, HR, IT, etc.) partnered with business unit leaders. This team will chair M&A strategy, implementation and execution. We also recommend this internal team be supplemented with outside advisors who have M&A core competency.
- Develop an M&A Strategy – This vital step must be proactive, not reactive. Perform market research, build a list of targets that match specific business unit goals and objectives and create an execution and integration “playbook.”
- Perform Extensive Diligence – Undertake a thorough review that includes financial analysis and valuation, customer and vendor alignment, systems and processes, market analysis, legal standings and cultural fit, to name a few. Avoid a “check-the-box” approach in favor of a focused understanding of how the acquisition will make you more vital and valuable to current and future customers. Concentrating only on reducing costs and overhead will make you lose sight of the larger, more important prize.
- Integrate Relentlessly – the integration process should begin long before the acquisition is closed and ultimately determines whether or not an acquisition will be successful. Integration should not be delegated to junior resources and should be chaired by a senior leader within the company and a senior leader from the acquired business. We also recommend some percentage of the M&A team’s compensation be tied to hitting integration goals.
- Learn When to Walk Away – Deal heat can be a killer and it is important to know that most successful acquirers walk away from more deals than they actually complete. This can be especially true with distribution businesses where most of the value is in the people. A transaction can look great on paper but if there is a cultural or operational mismatch the results could be disastrous.
In summary, lower valuations and less competition for acquisitions have created a golden opportunity for buyers with the cash and confidence to make strong strategic moves in a tough market. Utilizing this window of opportunity with a sound M&A strategy and experienced deal team could generate value creation opportunities that may not be seen again for a long time.