With Traditional M&A Players Still on Sidelines, Small and Mid-sized Businesses Have Unique Opportunity to Make Strategic Acquisitions
The recent economic turmoil forced rapid change on the mergers and acquisitions marketplace, as the tightening of available credit pushed traditional M&A players—primarily private equity investors and large corporations—to the sidelines and dramatically slowed existing transactions. The landscape yielded a dearth of profitable deals, with any residual motivation for investment in mid-sized firms deflated by a lack of attractive exit strategies and the downward trending of IPOs. It seemed the very engine of the mergers and acquisitions sector had ground to a halt.
However, that evolving landscape has also created a shift in power, placing a new breed of M&A players in a rare position of strength. As traditional investment firms have hesitated to participate in smaller transactions, a cutting-edge class of strategic acquirers emerges: small to mid-sized businesses. Though not generally cast in the role of strategic acquirer, the current economic conditions have proffered a “limited time only” channel for these companies to accelerate their business.
To capitalize on this significant advantage before private equity makes a full return, small business executives should examine whether a well-structured deal makes sense in the context of their goals. Even those companies that would not typically consider strategic acquisitions should weigh the option as an area for improvement and proactive growth. Business leaders should take three steps to make the most out of their potential:
Take a fresh look in the mirror: Regardless of previous strategic goals, companies that have reasonable liquidity, resources, or access to credit should reflect on their potential as a buyer. The shift in the balance of the M&A market is too auspicious a change to let pass without sufficient review. This is a rare opportunity for forward-thinking leaders to establish a new stronghold and gain significant ground on the competition.
Business leaders should therefore consider what could be gained through an acquisition. Is there, for example:
• a competitor’s talent pool that is well recognized, trained, and ready to make an immediate contribution
• a drop-in sales channel or product line that expands revenue streams
• an operational structure that is better suited to drive aggressive growth.
A finely tuned, well-aligned deal can vault a company ahead of the competition, even if the previous plan had been only for organic growth. Adapting to changing landscapes is part of what sets a business apart, and a decision to pursue sensible growth under unique terms must be made with agility and foresight.
Keep risk in check: Even the most synergistic of deals comes with associated risk. Effectively mitigating that risk is an essential element of a sound acquisition and can be managed through careful deal structuring and meticulous analysis.
The use of seller paper and earnouts are popular tools to structure deals, as both allow for payments to be spread out over a period of time. Earnouts also require certain benchmarks to be reached before any payouts are dispersed, ensuring that the acquired executives stay committed to the future success of the company throughout the transition and into the future.
Companies that avoid rushing into any deal are ultimately rewarded. Comprehensive examinations of financials and practices, as well as structuring the deal to mitigate risk, will in the end support a fully integrated post-merger environment.
Stay true to the vision: Executives need to have a clear understanding of exactly why they are pursuing an acquisition and should be sure that any deal furthers these goals. A full review of corporate cultures, management styles, and business processes of any potential acquisition should be conducted at the outset.
Business leaders must not only prioritize areas for analysis that are strategically important, but also prepare to pass on the deal if its components are not as well aligned as initially thought. While the due diligence process may reveal impressive strengths in unexpected areas, it may also show shortcomings around the original strategic intentions. This thorough analysis should be conducted before a company becomes too embroiled in the deal to walk away.
Ultimately, it is critical that acquirers identify how a target company will improve their position, and even more critical to stay focused on those drivers as the deal comes together. Essentially, exploring a strategic deal requires proof that the motivating reason for a merger will be effective when integrated with the acquirer’s operations.
Though the opportunity for strategic acquirers to enjoy a competitive advantage is real and immediate, it will diminish as the economy continues to improve. A semi-annual survey published by Thomson Reuters in May shows that 85 percent of dealmakers expect M&A activity to pick up in the next six months—up significantly from just 56 percent a year ago. Already, as banks begin to loosen their purse strings, private equity is finding its way back into the foreground, shrinking the window of opportunity for small business-driven acquisitions incrementally each day.
Smart, synergistic mergers can mark a groundbreaking level of performance for small to mid-sized companies that are willing to ask if a well-structured deal might make sense for their business. When the economy completes its recovery, small businesses that make the most out of this opportunity will be better positioned to meet short term goals and come out of this tumultuous economy on top for the long term.