Turning David into Goliath: The Challenges of Growth Through Acquisition

21 September 2016 by National Bank

Companies often use the acquisition of another company as a tool for growth. Yet acquisitions require careful planning if the process of bringing two companies together is to be successful.

“Sometimes, the best acquisition is the one that didn’t happen!” jokes Pierre Bérubé, General Manager, Transaction Advisory Services – Middle Market at National Bank Financial. But there’s more than a hint of truth in Pierre’s light-hearted warning, given how complex the acquisition process can be. Because it takes the right mix of ingredients and planning to reach that happy ending—and there’s no room for improvisation.

Picking your target

One of the first steps is to narrow down your target. “Some entrepreneurs run on instinct and will jump on an opportunity without really thinking it through. Yet there’s a lot to gain from strategically assessing your own organization and clearly identifying the kind of acquisition that would benefit your business,” explains Pierre.

Do you want to expand your territory, increase your market share, add an additional product or service to your lineup, eliminate a competitor through acquisition or work in partnership with that competitor? The possibilities are many.

Acquiring a supplier or new talent

Acquiring a supplier is another option—and a great way to secure the availability and quality of the supplier’s product—according to Andrew Papadopoulos, professor at the Department of Strategy and Corporate and Environmental Responsibility at Université du Québec à Montréal’s School of Management. “But if the supplier in question also sells to your competitors, they may take their business elsewhere and leave you with a shortfall. In that case, you could stand to lose more than you gain,” he points out.

Acquisitions can also be a way to access coveted human resources and talent, which are also crucial for growth and success, particularly in the service sector.

Be aware of what’s at stake

Once the target has been identified, you need to find out if it’s for sale. “Numerous business owners approached by potential buyers have no intention of selling. The only reason they pay any attention to a purchase offer is to assess the market value of their company,” says Pierre. Business owners might not be prepared to give up their “baby” after investing years and years of hard work.

The culture gap

There may also be significant differences in business culture, for example, a family business being targeted by a company with a more traditional management structure. The owner of the family business may fear that the company will lose its character after the transaction.

In cases like this, an advisor from a firm specializing in mergers and acquisitions or from a financial institution can help by bringing an objective view of the transaction to the table. Sometimes, relatively minor issues can create a deadlock, like when sellers are concerned about their role in the company after the transaction. An advisor can identify and iron out these issues. The presence of an advisor is also an indication of how seriously the buyer views the transaction, which can help reassure the potential seller and facilitate negotiations.

Cash or shares?

“The seller’s intentions must also be taken into account in the offer to purchase. For example, if a seller is close to retirement age, has no kids waiting in the wings, and wants to leave the business, he or she will most likely not want to keep a percentage of the shares and would prefer to receive cash. On the other hand, a younger CEO might be willing to give up all or some of his or her shares in exchange for being able to continue at the helm of the company. These possibilities must also be explored and evaluated,” advises Andrew.

In addition, remember that the success of the transaction depends largely on the price paid. If it’s too high, or if the buyer overestimates the upside impact on costs or sales, the acquisition will miss the mark and could even threaten the very survival of the buyer’s business.

The challenges of integration

Transferring authority or ownership is not the be all and end all of an acquisition. Successful integration is also a critical factor. Aligning technology is one notable concern and can even result in substantial costs when two very different IT systems must be merged.

Human resources, which represent a significant portion of a company’s value, also need to be taken into account. If managers and employees are concerned about the transaction, there is a good chance that integration—and its expected benefits—will be compromised. “But these challenges can be alleviated and cultural differences minimized. For example, you can keep the CEO in charge or leave the management team in place. It’s all about finding ways to address the fears and expectations of individuals,” suggests Andrew Papadopoulos.

Because when it comes to acquisitions, clearly determining and preserving what gives the company value is essential. “Sometimes, the success or knowledge base of an organization is in the hands of just a few key individuals. Those are the ones to keep,” says Pierre Bérubé.

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