Commentary & Analysis
A Short Course in the Fundamentals of M&A
New Direction Partners has taken its M&A consulting on the road in a series of presentations. In these briefings, NDP offers an overview of the business climate for mergers and acquisitions, along with practical advice for owners pondering the next step in the life cycles of their companies.
By Patrick Henry
Published: December 3, 2010
“Today, virtually everyone is either a buyer or a seller.”
New Direction Partners (NDP) has taken its M&A consulting on the road in a series of presentations including a session at WhatTheyThink’s Print CEO Forum during Graph Expo 2010. In these briefings, NDP offers an overview of the business climate for mergers and acquisitions, along with practical advice for owners pondering the next step in the life cycles of their companies.
Most recently, in Plainview, NY, NDP partners Peter Schaefer and Jeff Riback keynoted a program presented by Printing Industries Alliance, one of NDP’s trade association partners. Speaking primarily from the acquiring company’s point of view, Schaefer and Riback outlined a six-step acquisition methodology and gave guidelines for assessing the desirability of acquisition targets.
“M&A has become a mode of survival in the printing industry,” said Schaefer (left), citing a general market decline that is forcing many firms—particularly smaller commercial printers—into liquidation. The printing industry is fragmented, he said, and fragmented industries inevitably consolidate. Because consolidation will continue, observed Schaefer, “today, virtually everyone is either a buyer or a seller.”
Growth for the Growing
They both agreed that in these circumstances, often the best way for a healthy company to grow is to grow by acquisition. In a well-planned and executed acquisition, buyers with excess capacity to fill can find the volume they need in the active accounts of the company they acquire. Sellers are rewarded for the value they have created and, depending on how the deal is structured, may find new roles in helping to secure the future of the merged company.
A merger, Schaefer said, typically is a six-step process that begins with defining a strategy—a set of goals—for the acquisition. The next step is to identify a target, and once the target is confirmed, a preliminary review can begin. Negotiation follows, and as a part of it, the buyer undertakes the fact-finding exercise known as due diligence. At this point, said Schaefer, it will be time to circle back to the beginning and decide whether the information gathered justifies an offer to the seller.
Many objectives can underlie one company’s wish to acquire another company. Riback (right) said. The most common strategic goals are to grow revenue, increase equipment utilization, and boost profitability through efficiencies of scale. With a new book of business in hand, the seller might also be able to reduce its dependence on a few top customers while penetrating new vertical markets. And, Riback noted, nothing shows current customers that a company is in growth mode better than a successful acquisition.
Factoring in the Human Element
Schaefer said that once the objectives have been clarified, there will be a framework for determining what kind of strategic fit the candidate company will make. But, the preliminary review should also try to anticipate the human element: the interplay of personalities that will take place after the acquisition is complete. One good sign would be that the candidate company has personnel who will enable the buyer to fill gaps in its own management structure. Understanding exactly what the seller wants, both professionally and personally, is the key to assuring compatibility with the seller’s entire management team.
During the preliminary review, Schaefer continued, it’s crucial to identify deal-breaking issues before time and money are committed. “The purchase price is not the first thing to focus on,” he said. Equal attention should be paid to the condition of the seller’s financials; its profitability and cost structure; the amount of debt it is carrying; the existence (or the absence) of a succession plan; and the loyalty of its customers.
In due diligence, everything from finances and intellectual property to sales and human resources may come under scrutiny as the buyer tries to identify obstacles...
Getting answers to these basic business questions, said Schaefer, will help the buyer establish a negotiating posture and set the terms of the non-binding letter of intent (LOI) that will be presented to the seller as the negotiation moves into the due diligence stage.
Riback described due diligence as an in-depth investigation aimed at supporting the purchase—a thorough and detailed review that will determine how closely the condition of the acquisition target conforms to what the seller says it is. In due diligence, everything from finances and intellectual property to sales and human resources may come under scrutiny as the buyer tries to identify obstacles that might stand in the way of proceeding with the deal. Riback stressed, however, that the scope of due diligence will vary from case to case, depending on how the acquisition is to be structured. (For a more in depth study, read Patrick Henry's story on due diligence with NDP.)
Does It All Add Up?
Armed with the knowledge gained in the preceding steps, said Schaefer, the buyer now is ready to “circle back” to the original intent and make the final judgment call. The questions to ask at this stage are summary in nature: “Did you find a company that fits your strategy? Do you understand the personal issues and needs of the seller? Does the due diligence support completing the deal?”
“If the answers are yes,” Riback said, “make an offer.”
Schaefer and Riback also offered checklists of attributes to seek and avoid when contemplating an acquisition. They emphasized again that not all buying criteria apply to every deal—some that are relevant in certain negotiations may be non-issues in others. That said, however, they mentioned the following print business characteristics as examples of what belongs in the “good” column:
- advanced technology such as web-to-print; digital printing capability
- specialization in a product category or an ancillary service
- an early-stage, long-term lease
- a chief executive officer who is willing to stay with the business
- strong business ethics and a contented and loyal workforce
Bad characteristics, said Riback and Schaefer, include
- unionization (not always a deal-breaker, but a potential source of complications)
- obsolete equipment; poorly kept plant
- commodity pricing; declining revenue; weak EBITDA
- lawsuits and tax problems; difficulties with suppliers
- excessive concentration of business in clients; excessive concentration of accounts in salespeople
Riback and Schaefer concluded by saying that every company with an opportunity to acquire another company can make the most of it by seeking the help of M&A professionals. Expert advice is indispensable, they said, at every stage of the deal-making process.