PCE Investment Bankers recently led expert panelists in discussions about “Best Practices in Corporate Development” at the Strategic Research Institute’s Annual Aerospace & Defense Investor and Corporate Development Conference in Reston, VA.
Joining us were the mergers & acquisitions (M&A) leaders of some of the most acquisitive and respected companies in the industry, an elite line-up that included the following: Esterline VP of Strategy & Technology Steve Larson, Lockheed Martin M&A VP Chris Demain, ITT M&A Director Bob Rose and CAE Professional Services Division President Chris Pogue. All four firms are active acquirers that consistently demonstrate an ability to pay handsome prices, close deals rapidly and continuously create shareholder value via acquisitions – a winning combination of factors for all stakeholders that makes these the “buyers of choice” for owners considering selling their companies.
I left the conference thinking about the importance of identifying and targeting buyers of choice. What follows is what we believe to be the most significant criteria, as well as some implications regarding one’s ability to obtain the best price, terms and conditions when selling one’s firm:
Buyer’s Strategic Fit with the Client
Strategic buyers are called strategic buyers for a reason. They are typically interested in companies with capabilities that are difficult to acquire via internal development. They also intend to use those capabilities to either compete for programs for which they would otherwise not be able to bid or bid on programs with an increased probability of winning. A strong strategic fit is the starting point for buyer selection; however, strategic fit does not necessarily mean “they do what we do.” Sometimes the best buyer for a company may be the one most eager to enter a new A&D segment via acquisition precisely because market entry via internal development is too risky, costly or slow. Also subsumed under fit is culture – will the buyer respect the culture that has made the company an attractive acquisition candidate?
The better an owner (and investment banker) can identify and gain the attention of strong-fit companies and articulate the strategic rationale for a sale – from the buyer’s perspective – the better the chances of attracting the interest of those buyers.
Buyer’s Appetite for Acquisitions in our Client’s Aerospace & Defense Segment
A company that is not in “buy mode” is not an attractive buyer even if the fit is compelling. An otherwise active acquirer may have deal fatigue at certain times for certain reasons. One’s banker should have a general sense of a potential buyer’s appetite for particular types of companies and domains at any given time.
Buyer’s Ability to Pay Full Price
Similarly, one’s banker should have amassed a sizeable database of prices buyers have paid for acquisitions and be able to share which companies have a reputation for paying top dollar for their acquisitions, versus which ones are bottom feeders that will fight you for every dime. And, of course, deal structure, terms and conditions for any given price also matter.
Buyers of choice will typically request a financial forecast to determine a selling company’s value; however, unless that company is publicly traded, its perceived value is highly subjective – and value and price are rarely the same. Beyond establishing a competitive market for the sale of a company (e.g., via a thoughtful auction process) and successfully approaching strong-fit potential buyers, nothing can increase one’s likelihood of getting a good price than being able to provide and defend a credible forecast. In the absence of a credible forecast, value will certainly get appropriated by the buyer rather than accrue to the owner.
Buyer’s Ability to Close Quickly
The best buyers are certainly those who can pay the highest price for the business while also meeting other important criteria, such as being able to take the company to the next level or preserving a culture that an owner carefully nourished over the life of the company. While ability to close certainly implies financial ability, it also speaks to the ability of the buyer’s M&A team to secure the approval of its corporate leadership and board of directors, as well as any necessary government approvals. At the end of the day, a great offer that cannot be consummated, for whatever reason, is no offer at all.