Expansion Part1 - Growth Opportunities of Mergers and Acquisitions22 Oct, 2007 By: Tom Callinan imageSource
Expansion Part1 - Growth Opportunities of Mergers and Acquisitions
This is a two-part article about mergers and acquisitions. This first part
will be from the perspective behind the dealer-principal who is purchasing
another office equipment dealership. The second part in next month's imageSource
will concentrate on all aspects of being acquired.
Doing an Acquisition
What are the reasons to do an acquisition? Additional growth opportunities,
elimination of a competitor(s), expansion of market area, and leveraging core
strengths are just a few of many reasons why acquisitions are done. Sometimes
it is a defensive play, and at other times it is simply an opportunity to grow
revenue and/or market share in new or existing markets. Regardless of the
rationale, you need to understand the dynamics of mergers and acquisitions as
this activity has played a key role in the imaging industry over the past 25
years, and I don't see it subsiding anytime soon.
Throughout this article, we'll examine several aspects of mergers and
acquisitions, relative to the acquisitive side, including: Acquisition factors,
due diligence, assimilation plans, valuation, and communication strategies.
Mergers and acquisitions require detailed plans and objectives, as well as
active participation of the dealer principal. This isn't the task to delegate,
particularly if you haven't done this before.
Acquisitions are strategic, and as such, they take plenty of time. This
includes all types of acquisitions from the absorption of an installed base of a
one-person organization to a merger of equals. Be prepared to dedicate a
majority of your time to your planned acquisition, and allow much of this time
to be spent after-hours in site visits, discussions, analytical reviews, and
Strategic fit is the most important element of any acquisition. Commonality
of product line, market area and operating philosophies are the most ideal
conditions, and will probably lead to the most synergies and a more manageable
integration process. There is tremendous benefit when this occurs, and this
shouldn't be taken lightly.
Conversely, an acquisition in a different market area or an area where your
share is weak can also be strategic, but it could prove to be more challenging.
This also applies to a product line that you don't carry, but may have stronger
products in certain segments, better color, or a more strategic R & D processes.
However, if you plan to convert the acquired base to your product line, be aware
that you will not achieve 100% conversion, but more on that when we discuss
Understand that acquisitions outside your market area, with different product
lines and conflicting go-to-market strategies will be more difficult to
assimilate, but certainly not impossible. Awareness and detailed planning will
make this hurdle more manageable.
Employee knowledge, market share, service reputation, strengths/ weaknesses
and overall customer satisfaction levels are other strategic factors that must
be evaluated when considering an acquisition candidate. Each of these dimensions
is different and depends upon the acquiring company's needs. For instance, there
may be a strong service manager employed at the acquisition target that would
satisfy a need in the acquiring company. On the other hand, customer
satisfaction levels could be low in the possible acquisition company, but the
acquiring company may be confident that their processes can be implemented to
quickly eliminate that weakness.
Acquisitions are all about developing synergies, and the more that are
uncovered, the greater the chances of success within a reasonable time frame.
However, when there are limited synergies with a potential acquisition company,
then the payback is generally longer and the implementation process more taxing.
And while a large number of synergies may drive a higher purchase price, less
synergy should equate to a lower acquisition cost.
Acquisition values are assigned by two methods–a factor of the installed
copier population, or a multiple of earnings.
Recently, the Japanese manufacturers have made the installed base valuation
methodology popular as their acquisition strategy revolves around generating new
box placements in support of their assembly lines. As mentioned earlier, one of
the problems with this method is the actual conversion factor, which can vary
widely between the same product of the current installed base to a different
product in a competitive base.
I prefer a purchase price based on a multiple of earnings because it can be
more easily identified, measured and tracked. While the specific multiple
varies, it can be increased through the identification of additional synergies,
common product lines or strategic purposes. On the other hand, the multiple is
reduced with limited synergies, weak market reputations, and/or poorly run
Regardless of the valuation method used, return on investment is the
principal determining factor of the purchase price. Better integration success
can shorten the payback period, but poor implementation can result in lower
returns than expected.
Usually by this point in the sale process, both buyer and seller are
emotionally committed, but that should not preclude a thorough completion of the
due diligence process. For the most part, the due diligence process helps to
identify unknown problems, and confirm opportunities. Sometimes, the outcome of
due diligence will yield a reduction in the purchase price, but that should not
be the premise of the exercise.
Due diligence is the opportunity to drill down into any area(s) of the
company you are acquiring. Usually, this process concentrates in the accounting
arena with particular attention being paid to accounts receivable, inventory,
payables and accrued liabilities. This exercise should be managed by your CFO to
determine the quality of the assets you are buying, which will reveal valuable
information about internal controls and administrative process capability.
In the past, it wasn't a problem obtaining the manufacturer's approval of a
sale transaction, but recent history indicates that it shouldn't be taken for
granted. Make sure that the manufacturer's approval is secured early in this
process, and certainly in advance of the closing date.
During due diligence, you must review all legal obligations, contracts,
leases, etc, to make sure there are no surprises. Ask specific questions of the
selling principal and his/her staff about any liabilities, accounting methods,
judgments, etc. Involve your attorney and your accountant in this process.
The acquiring dealer/principal should be active and visible during the due
diligence process. If a site visit has not been previously conducted, now is the
time to complete that task. While a review of financial statements and a
discussion with the seller are important elements of the acquisition process,
nothing is as beneficial as a tour of the facility. This allows the buyer to
observe people (if the site visit is completed during the work day), inspect the
building, look at communications, and overall building maintenance. Moreover,
this process allows the buyer to get a good feel for the company's culture.
After the execution of the purchase/sale agreement and the completion of due
diligence, the acquiring company must create detailed assimilation plan to aid
integration. The most important element of this plan is the communication
strategy to all concerned.
There will be many questions for the employees of the acquired company,
ranging from “Will I have a job?” to “What about the health plan?” You must
create a structure whereby all questions are formally captured, resolved and
communicated within 24- hours. Don't underestimate the concern and anxiety of
the acquired employee base, and remember, that employee base is really what you
purchased so treat it with care.
A system of strong communications will help eliminate distractions and
complete integration sooner.
The key to integration is making the acquisition feel like a merger. Make
your new employee base feel good about themselves and the opportunities that
exist. Welcome them with open arms, and make sure that all your current
employees do the same.