It’s often assumed the reason for scouting the mid-market space for business acquisitions is a simple investment move. You have a reserve of capital or cash in hand and look for a profitable business which can be acquired to ensure that additional cash is adding value. That isn’t however the only reason to actively keep an eye on mid market companies which may be worth acquiring. The second or lesser considered motive is to keep an eye open for businesses that may be able to add to your company’s capabilities through an outright acquisition. In such cases even a moderately profitable or even loss making business may still prove to be an asset and result in extended capabilities for your business and contribute in a huge way to growth.

A hypothetical example would be if your company has a fantastic product which has the potential to leave competition in it’s wake but you face a challenge while trying to build a nationwide distribution channel for it and in the time it would take to, you stand to lose precious market share. In this kind of a scenario locating, evaluating and acquiring a comparatively unprofitable business in the same space but with a well established supply and distribution network could turn into an invaluable asset in your existing growth plan. In this case the motive is operational synergy.

According to an NYU Stern paper written on acquisition motives:

Sources of Operating Synergy

Operating synergies are those synergies that allow firms to increase their operating income, increase growth or both. We would categorize operating synergies into four types.

1.     Economies of scale that may arise from the merger, allowing the combined firm to become more cost-efficient and profitable.

2.     Greater pricing power from reduced competition and higher market share, which should result in higher margins and operating income.

3.     Combination of different functional strengths, as would be the case when a firm with strong marketing skills acquires a firm with a good product line.

4.     Higher growth in new or existing markets, arising from the combination of the two firms. This would be case when a US consumer products firm acquires an emerging market firm, with an established distribution network and brand name recognition, and uses these strengths to increase sales of its products.

Operating synergies can affect margins and growth, and through these the value of the firms involved in the merger or acquisition.

Unfortunately, unless an organization has an agenda to actively seek out acquisition opportunities which can help them explore operational synergies, a lot of good acquisition prospects fly under the radar and get overlooked which could have added value at some part of the operational chain. While decisions to explore options for building on capabilities only come by from time to time when there is a realization that there is a challenge, good acquisition prospects are worth keeping a tab on at all times.

When the motive is beyond looking for an attractive and profitable venture to acquire as a direct financial opportunity even one which seemed financially ‘one to pass on’, may in fact have been the perfect opportunity to add on operational strength that could take your business to the next level. Value after all, isn’t always found in the accounting books!

posted by Sayantan Bhattacharya

Valuation Indicators For A Sound Acquisition Or Merger

Perhaps the last thing an investor wants is to find out their recent business acquisition needs to be injected with more capital and investments to get back on the growth path they expected from it. The financial books looked promising during the valuation process and yet, often buyers find themselves in a situation where after acquisition, everything is not what it seemed and the effort to get the business back on track may have them questioning their decision in the first place.

The business valuation process is critical in the acquisition or merger move and needs to be a multi-dimensional one. While some buyers can make their decisions based on a review of the current year and previous years financials extrapolating them to determine the potential of their acquisition or investment, it’s a good idea to get a more intensive valuation done from a third perspective to cover all bases. Valuation of a business especially in today’s context when customer acquisition strategies and assets have evolved so rapidly is not a one dimensional process. While the financial numbers are an important consideration and indicator of a sound acquisition, one needs to look under the hood so to speak and analyze the engine that propelled the business to those figures. More importantly for acquisitions, one needs to ensure that engine has what it takes to drive that business into the coming years.

The engine under scrutiny here is the ‘marketing assets’ of the business. All things being equal in terms of financial figures over the past few years, a company that has built very solid marketing assets which are working to bring in the revenues is likely to be a better buy than one that’s relied on some very talented sales resources who have managed to pull in a good amount of revenue before the sale of the business. The marketing assets depending on the type of business in question can range from:

CRM database
Brand Equity
Online Brand Value
Website Traffic & Community
Distribution Network
Channel Network / VARs
Lead Nurturing System

…and more. The important factor being, they all contribute to a system which ensures a pipeline of future business on an ongoing basis. While this may seem all to simple, they are often ignored in the valuation process and as a result critical indicators may be overlooked during the evaluation stage which should have been spotted.

A technology business with a large online community and a popular blog could translate into a steady channel for inbound leads in future. A second technology business that financially has been growing at the same rate due to a talented sales team and few big contracts that are due to expire in a years time would need more effort post-acquisition to keep up the growth rate. Similarly a mid-sized budget airline that has consistently been building a robust CRM database and developed a lead nurturing system to reach out to customers regularly is more likely to have steadier growth as compared to one that doesn’t.

A thorough, multi-dimensional business valuation can make all the difference in an acquisition or merger bid. Once you have read between the lines and know that nothing has been left to chance, rest assured the right deals can be made.

(For more on Business Valuation download : Valuation: Getting The Right Price When Selling Your Business)

posted by Sayantan Bhattacharya

The Times News Network today reported on the possible findings and suggestions of a committee set up by SEBI (Securities And Exchange Board Of India) which could have a significant impact on the M&A market within the country. According to the news agencies, the panel is expected to announce some significant changes including changes in the distribution or abolishing altogether the “Non-Compete Fees” which is usually paid to promoters as part of the acquisition deal. While the details of the announcements will become clearer over the coming days here is a quick overview of the expected changes:

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According to a recent survey by Ernst & Young 54% of the Indian companies surveyed said they are likely or highly likely to acquire other companies in the next 12 months. It’s not just acquisitions of local businesses but in recent months the interest in overseas business acquisitions as a means of expanding into global markets has also been on an upward trend.

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