Florida CFO Group partners Dale West, Jay White, and Betsy Bennett discuss:Looking at a Potential Purchase -- sizing up acquisitions and determining if an acquisition strategy is right for your organization.
What Makes an Acquisition a Good Fit
Betsy: Having an acquisition plan depends on the culture and the ultimate strategy of an organization. For some organizations an acquisition strategy would not be compatible with their overall strategy. For others that want to grow their top-line very, very quickly, they almost have to have an acquisition strategy.
Dale: An example of a situation where an acquisition strategy may not be compatible with the culture is a family-owned business that feels very strongly about the family heritage.
Jay: One of the dangers for organizations is a "not-invented-here" culture. An organization always staying in-house and developing their own products or solutions. This can really limit a company's growth. I think every organization should be open to making acquisitions, because to me it comes down to a make or buy decision -- Are you going to invest the time and effort to make the product or just step into somebody else's shoes for a price and buy the product?
Dale: In a lot of cases you may not be considering an acquisition as part of your strategy, but your strategic plan should contemplate when an acquisition makes sense.
Jay: Yes, being aware of the possibility and being open to it.
Dale: Be open to it and have a process in place to identify the criteria that may make sense, even if you are not actively looking for acquisitions.
Betsy: But if the existing culture holds strongly that if something is not developed here it does not warrant our time or attention, I think you are wasting your time and money by looking at any acquisition until you can get beyond that.
Jay: Exactly. I was working with a fast-growing high-tech company that was looking to buy a division of a veteran telecommunications company. But the culture was just too different. We could not resolve the cultural differences, so we passed on the acquisition.
Betsy: I agree. At one of my former companies, we passed on an acquisition where the financials, the numbers, everything made sense, but we knew the culture would not match and the numbers would really never be realized. Basically it was a recognition that the assumptions used in the projections were not supported by the assessment of the cultural match between the two companies.
Dale: But sometimes an organization needs to acquire a company that is culturally different from itself in order to transform itself or to be a better organization?
Betsy: There's a good example here in Tampa. A large credit card company bought a local company which was trying to take the payment strategy away from using a card. One of the reasons they bought them was to bring their culture of innovation into the larger, more established financial services firm. So, they went for the acquisition to help them nudge their culture.
Dale: Often acquisitions target specific skills or technologies. You can get them faster through an acquisition than you can build them yourself.
Betsy: Well, you know, that goes back to the fact that a lot of your company's value resides in your people regardless of how the people manifest the value. That is the one asset that is not on the balance sheet.
Jay: In the construction industry we always have the saying that the value of the company walks in and out in the owner's shoes. It is kind of rare to ever see a construction company acquire another one because once the owner leaves, all of his contacts, and knowledge, and everything leaves.
Dale: But sometimes the intellectual value might have been in terms of patents or something an organization needs to enhance their marketing. It may not necessarily be an individual's value.
Betsy: I was involved with a sale of an organization where the conditions of the sale were that key sales people agreed to come with the new company. If they did not, that deal would not have gone through because the connections they had were of utmost value to the acquirer.
Dale: What an organization needs to look for in a potential acquisition depends on your industry. If you are in a mature industry, consolidation and acquisitions make sense. You are removing excess capacity and consolidating supply, and it makes sense from that perspective.
Jay: Yes, and if you are in a mature company, and you look in the R&D department and think, "Well, there is really nothing exciting coming along" you better be looking for an acquisition to kick start the new product cycle.
Betsy: And complimentary to that, Jay, is if you are just looking to expand your territory. Again, it is a question of do we buy it or do we grow it organically? You will get quicker expansion if you buy someone in a different geography doing the same thing. You will hopefully reap the benefits of the scale.
The Role of the CFO in an Acquisition
Jay: These are questions where we as CFOs are part of the team. We aren't driving these decisions, because a lot has to do with product, R&D, and sales. We are there to lend guidance. Then when management decides this is a good idea, then it comes to our department to run the numbers just to see what it is going to look like or perhaps justify it.
Betsy: I was going to say the other thing that is key to the CFO's role when evaluating a transaction is there is always assumptions of synergies that are going to occur as a result of combining companies. You really have to peel back the onion on truly what we think is going to occur as far as the synergies and the cost savings. You have got to be the…
Jay: Doubting Thomas.
Jay: You have to be the doubting Thomas, a skeptic. Convince me. Show me how it is going to work because how many roll-ups have we seen where they thought they were going to make a fortune by eliminating redundancies in the back office and then the next thing you know, somebody has to go in and undo the roll-up?
Dale: It's important to be part of the team. You want to make sure that you are a voice. For example, are we getting the distribution channels we want out of this acquisition? You are having to rely on other key members for the answer, but your role is also help make sure there are no problem areas not identified in due diligence.
Jay: I think the younger the management team we are working with, the more mentoring and nudging we have to provide.
Betsy: Yes, and even beyond due diligence to the integration because that is usually where a lot of the things start coming out of the woodwork. If you do have an inexperienced management team, often this is where you are going to fall down. It is not being able to do the integration correctly to get the results that you are projecting.
Jay: In larger, more experienced companies when you say, "I cannot make the numbers work out." They will say, "Okay." And in most cases, move on. That would be it. In a smaller, younger company, people are going to say, "Are you sure? It is this great product."
Dale: They get emotionally attached and pay too much.
Jay: That is right.
Dale: I think a lot of times it's the way you model it or project it on out. For example, you can show that for the acquisition to work out, sales may have to be 50 percent higher as a result. Basically, just modeling it where the team members have to take ownership of their assumptions.
Jay: You frame it in questions and put it back to them. Can you really do this? Are these assumptions you made accurate based upon what we have been able to do ourselves?
Dale: I have done that a lot, even in the publishing industry. "You realize to be able to hit that revenue number you are going to have to sell 42 more pages of advertising a week. If you can't do that, then we either need to raise our rates or we need to readjust our revenue."
The Keys to a Successful Acquisition
Betsy: So it's really important to have a basic understanding of what you need to do to make your acquisition process successful. First, be very, very clear on what your objective is, make sure you have the right people at the table looking at doing the due diligence and running the numbers, and make sure you do not fall in love with the deal and let the numbers talk to whether the deal should move forward or not.
Dale: Yes, you need good planning, strong management, and good advice. The advice is probably most important, but a lot of people do not seek it out. Even if you know what you want, you need a third set of eyes to look at it, somebody relatively independent.
Jay: And you really need a good deal attorney. You need to make sure you have the right external expertise looking at the deal with you.
Betsy: But the first and most important factor is to be clear about your objective: Why are you looking at this acquisition? What is it you are trying to achieve?
As Jay was saying, it could be that you are looking for a product. Your competition has a product and it would take you two years to develop it, and you want it now. It could be that you want geography. A lot of times, particularly in a less seasoned management team, the objective of the deal gets lost. When we see this, it is almost a nonsensical financial model. It is clear by our modeling that management is not clear on what the objective is anymore. Like any other strategic move whether it involves an acquisition or not, you just have to be very, very disciplined on what your ultimate objective is.
In our next blog Florida CFO Group partners Mark Brown, Harold Hale, and Dawn Johnson discuss Exit Planning.