Cross-border acquisitions for medium-sized companies
External growth through cross-border acquisitions is no longer an option exclusive to large multinational corporations. The fast pace of technological developments, the consolidation and increased international scope of most industries offers plenty new business opportunities for mid-sized companies.
More markets are opening in the new member countries of the European Union and beyond. On the other hand, growth is essential in order to succeed in today’s global economy: companies that do not achieve a critical mass will eventually fail or become acquisition targets themselves. Identifying opportunities for external growth has therefore become common practice for medium sized companies serving international or local markets. Unfortunately, the outcome of an acquisition is often behind original expectations. Penetration of new markets is slower than planned, synergies are not as substantial as foreseen, or new technologies cannot be utilized easily. The good news is: success of an acquisition can be strongly influenced by the buyer by the means of solid preparation and a well organized mergers & acquisitions process.
Develop strategy and objectives of the acquisition
The acquisition of another company is likely to have a significant influence on the future of the acquiring business. Mergers & acquisitions is therefore a strategic task and the relevant stakeholders of the business need to be involved early to decide on what is to be achieved through the contemplated acquisition. An acquisition can serve a wide variety of objectives, such as the increase of market share, expansion of customer base or product portfolio, entering new markets, access to new technologies or the extension of the business along the value chain, just to name a few. Among all these options it is easy to lose focus. Therefore, the sine-qua-non of a successful M&A process is a well-defined acquisition strategy that is in line with the overall strategic plan of the business. While all possible options need to be evaluated, the further steps of the acquisition process need to be in line with the strategy defined in the beginning. The early involvement of an experienced mergers & acquisitions advisor can be of great value in determining this acquisition strategy, as he is able to contribute fresh views on the business and can draw back on a powerful network within his client’s own as well as related industries. The advisor of choice is an entrepreneurial thinker who is familiar with the nature of medium sized companies and is able to provide strong partner-level support throughout the entire process.
Define acquisition criteria and identify targets
Once the acquisition strategy has been developed, the criteria for potential acquisitions need to be defined. The central question is: what characteristics does a target need to have in order to fulfill my objective of acquisition? Criteria can be set in a wide range of dimensions including market share, nature of the customer base, potential for synergies, company size and maximum purchase price. Apply a broad view initially when selecting potential targets that fulfill the set criteria and condense the options down throughout your research. It has proven helpful to combine the knowledge within the company with the expertise of an external advisor, who can rely on a strong network not only in the financial community, and who can provide valuable market analysis. Hiring an M&A advisor is usually necessary to cover companies active in related industries and in foreign markets. The result of this second stage should be a handful of interesting targets including relevant information about the businesses and their industry. Additionally, the advisor will have prepared indicative valuations of the targets applying proven valuation methodologies, such as the discounted cash flow method and sector-specific metrics. Company valuations are often compared against benchmarks, such as multiples derived from comparable transactions in the past and comparable publicly traded companies. Contacting the potential targets is a sensitive issue and usually a task of the advisor. Once the willingness on principle to enter into talks has been established, begins the phase of obtaining detailed information from the seller. In most cases this requires the signing of a Letter of Intent (LOI), which includes indications of the key terms and conditions of an acquisition and an outline of the next steps.
A thorough due diligence of the target(s) is necessary to reduce the risk of a possible transaction and to avoid disappointment post-acquisition. Due diligence typically covers the financial, legal and commercial situation of the target, but depending on the type of business may also cover other aspects such as environmental issues. Electronic (virtual) data rooms have become the most common means to give access to company information today and allow 24/7 access to documents via a secure internet-connection. In addition, the target commonly offers the prospective buyer to attend management presentations and site visits to get to know the company and its key employees better. A good due diligence consists of extensive research, analysis and review of internal documents provided by the target. It requires substantial resources of the prospective buyer and the inclusion of experts, such as lawyers, accountants and tax advisors. Typically, an M&A advisor supports his client in coordinating the due diligence and evaluating due diligence findings. Based on experience from similar transactions, the advisor can help the client to identify issues relevant to the value of the target and prepare negotiation tactics accordingly.
The negotiations of the sale and purchase agreement mark the final phase of the M&A process. An experienced advisor is needed to assist the buyer in often lengthy negotiations and help their clients to maintain focus and scope. He will also be able to open new options in structuring a transaction, which can be structured as a share deal ranging anywhere from the acquisition of 100% of the target to a minority share or cooperation, or limited to the acquisition of certain assets.
The acquisition of another company is a complex process, requires thorough planning and involves the coordination of a large number of parties. The early involvement of an M&A advisor helps to avoid common pitfalls and assures a professional acquisition process, which is crucial for success. The relationship between the prospective buyer and his advisor is built on trust, which the advisor can only gain when he is independent, free from conflicts of interest and fully committed to his client. He has to have an entrepreneurial mindset and understand the particularities of mid-sized companies. These characteristics are the prerequisite to fulfill the expectations of his client and lead him through a successful acquisition.