Canadian executives are thinking “roll up to win”, says a recent study prepared by a Canadian accounting firm, but in this case it is less about donut house coffee promos and all about ‘strategic acquisition’ (i.e. consolidations or ‘roll ups’ when done in serial). The Grant Thornton study released earlier this month found that some 45% of Canadian executives foresee growth through merger and acquisition (“M&A”) in the coming three years.
“In the Canadian mid-market, it is a deal frenzy in nearly every sector,” says Jason Sparaga, President of Spara Capital, a boutique Canadian M&A firm that provides advisory services to both buyers and sellers.
Sparaga says it’s ‘Game On’ in both the buy and sell sides in the Canadian mid-market. He expects the balance of 2014 and 2015 to be banner years for groups like his across the country. Spara Capital offers the following five key areas that acquisition-hungry executives need to direct attention to in order to complete their buy-side transaction:
#1 Get Strategic and Plan From Why
The strategy driving acquisition is the starting point for any good strategic growth plan and weighing all the costs of building vs. buying that growth should be carefully weighed. Too often the first consideration executives give an acquisition is when they’re made aware by a seller or a seller’s representative. In other cases buyers can become so enamoured with companies or the idea of an acquisition that they get drawn away from their strategic course.
While Spara recommends that companies take an approach of ‘cautious opportunism’ and stay alert for ‘deals’, they counsel clients to build potential acquisitions as an agenda point to strategic growth plans. It is also important to remember that acquisitions can be extremely distracting and costly. Therefore one should always explore the cost of doing nothing as well as the opportunity cost from both a capital and resource standpoint.
#2 ‘Bone Up’ on Economics 101
All executives should ensure they have a working understanding of the basics of deal economics, metrics and transaction mechanics. Adding high-level understanding of industry valuations, transaction structures and debt parameters to one’s deep operational knowledge, can create a fundamentally different approach to strategic growth that many leaders find slightly intimidating. While detailed financial and capital modeling are developed in transactions, it is critical to understand the economics, potential economics and synergies of a combined entity. Many times strategic buyers would gladly pay what seems top prices for a business to outsiders, because the improved revenues and profits of a joined business seem to warrant the price. In short, information and solid assumptions are incredibly powerful in identifying, valuing, negotiating, closing and integrating a target, so executives need to learn the ropes at a high level.
#3 But Don’t Forget To Study ‘Humanities’ Too
Many times the non-economic or future economics are the real drivers of an acquisition and its current business is all but ignored. Acquisition of a new customer or supplier relationship, strong teams, market position, new products, services or technologies and even teams and divisions are regular drivers of acquisition. There are also a host of factors related to increased market share where the acquired entity might be completely absorbed or even shuttered in an effort to prevent the business from being sold to a competitor. While the non-economic rewards are often obvious, it is important that prospective acquirers also consider the non-economic risks.
#4 Culture, Culture, Culture
One of the most critical factors in the success of the integrated business post-transaction is cultural-alignment. Understanding and testing the culture of both the target and the acquirer at both operational and executive levels, take time and an unbiased introspection on all parts. Culture is implicit; it is usually very difficult for companies to identify their own culture, which benefits an acquirer who is already aware of theirs. But culture is also resilient which will make it difficult to ‘change’ the current culture of an acquired business. Companies’ norms, values, beliefs and assumptions have significant impact on decision-making, leadership styles and communication, making them all very critical to explore. Upon finding congruence, it is equally important to have a strong plan for announcing and integrating via mindful communications with employees, customers, suppliers and other stakeholders. There are great resources and professionals to provide guidance in assessing and integrating culture but one should never overlook ‘gut-feel’.
#5 The Right Team, The Right Process and A Strong Lead Advisor
Acquisition success requires a strong, cross-functional team and a rigorous, focused process guided by experts. Ensuring the right mix of internal team members and outside experts is not easy; it requires thought and careful adjustment. There are many considerations for an effective process, including confidentiality both inside the acquirer and in the marketplace. A high degree of realism at all points of the process is also critical as is creating a balance between extreme focus and discipline, with an ability to move quickly towards opportunities. Sparaga feels that the greatest value his team brings to a transaction is the role of Lead Advisor. He envisions his position as that of a “Deal Quarterback” working with clients to provide sound counsel and engagement well ahead of the Transaction, in order to help manage issues and exploit opportunities through the course of the deal.