Potential targets must be identified first based on their expected fit with the buyer’s corporate and growth strategy. These companies can, in turn, be ranked to obtain a shortlist by using further filtering criteria. These criteria can include; an evaluation of the target’s readiness to sell; an assessment of the existing relationships between the leadership of the buyer and target company; or simply the degree of urgency to acquire the desired capabilities or market position.
Thoroughness in assessing synergies is key to value creation. Once buyers are clear about what type of targets are the most attractive, they should begin to assess the opportunities for value creation on a case-to-case basis. While going through the shortlist of qualified targets, managers should clarify how they intend to promote synergies in the short term, and how they will grow the acquired brands in the longer term.
There are two principal errors managers make in assessing potential synergies. The first is arriving at an incorrect understanding of potential synergies. This often comes from leaving potential cannibalisation out of the equation, as well as foreseeing non-existent opportunities for cross-selling, or headcount and overheads reductions. The second error is having unrealistic expectations - that is overestimating potential gains or the management’s capacity for execution. To avoid such mistakes, it is important to form the right team to conduct the synergy assessment. Ideally, the team should have a balance between financially focused people, strategists and operations experts. More importantly, to become elite acquirers, managers should ensure that emotional attachment and individual financial incentives do not come in the way of unbiased decision making.
As far as growing the acquired business is concerned, managers should be equally thorough in detailing their plans. They should identify the specific leverage points they will rely on to grow the acquired business in the mid to long-term, and understand how they will allocate resources in order to reach their growth objectives. Critical areas to investigate at this stage include; the potential to accelerate innovation cycles, extend brand and product lines and even reposition the brand. Managers are generally thorough in answering these questions when acquiring a business they plan to turn around. However, when acquiring a healthy business, they often assume a linear progression of its current growth, despite the impact of the leadership and organisational changes it will undergo.
Having a team dedicated to chasing acquisition opportunities is a major advantage
With a list of high potential targets and a clear plan to generate value, managers are now hunting for the right targets in the right territory. However, to become elite acquirers, they still need to track their targets and be in the prime position when the time comes to pull the trigger. To ensure they are ready to secure deals before competing bidders, acquirers should have a team in place dedicated to pursuing acquisition opportunities on a continual basis.
The role of this team is to monitor the market for value-adding targets, track the results and future plans of each target, and build relationships with their key decision makers. It is often advisable to include outside professionals in the team to complement the internal team’s skill set. Further, it can be useful to engage a third party to facilitate contact between the buyer and the target when discretion is required.
After forming the acquisition team, it is crucial that the leadership clearly informs the team of the firm’s corporate and growth strategies to ensure targets are aligned with their objectives. To prioritise the team’s activities it is often useful to assess the readiness to sell of the target’s decision makers. To make this assessment, research on ownership structure is always useful, but other areas must be investigated as well. Financial difficulties, poorly performing brands, or market turbulence may all be powerful indicators that the time is right for a target to consider selling.
In addition to assessing the readiness to sell, teams should create a sale thesis for each target. This document should outline the major reasons why the target shareholders would benefit from selling assets, brands, business units or even the entire organisation to the buyer. The sale thesis is a crucial tool for aspiring acquirers to approach their targets with compelling arguments. It should be built with the same analytical rigour that would be applied to the writing of its counterpart, the investment thesis.
In complement to their research initiatives, team members should be proactive in developing relationships with top targets. The objective is to create enough trust and familiarity to promote open discussions about acquisition and divestiture opportunities.
The sale thesis prepared by the team should be introduced, discussed and refined during recurring interactions with the target’s management. At the same time, the aspiring buyer should be attentive to the fears and concerns of the target’s owners and managers. It is often important for the buyer to show its willingness and capacity to keep a business with a long history and strong sentimental value on the right track. In the same way, it is important to send the right signals to other stakeholders about the prospects of working under the new ownership, top events resistance and build allies before a deal is announced, or even decided. By tracking their targets closely, aspiring buyers can be in prime position with a suitably attractive offer when it’s time to pull the trigger.
In conclusion, managers will need to excel at acquisitions to succeed in a rapidly concentrating Indian market. To make better acquisitions, they can start by screening opportunities to match them with their chosen corporate and growth strategies.