This past Wednesday, February 15, ACG National Capital sponsored a roundtable discussion entitled, “Inorganic Growth Strategies to Drive Increases in Enterprise Value.”
This roundtable was a peer discussion for C-level executives to share insights on inorganic growth strategies, and was facilitated by the following participants:
- Mike Beach, CFO WeddingWire, Inc.
- Larry Davis, Managing Director, Aronson Capital Partners
- Dan Ilisevich, Chief Financial & Administrative Officer, Compusearch Software Systems, Inc.
- Tim Meyers, Managing Director, Baker Tilly Virchow Krause, LLP
- Jonathan Wallace, Managing Director, Outcome Capital
During the discussion, these individuals discussed common reasons and strategies for pursuing acquisitions to increase the value of a firm, such as: entering new vertical or geographic markets, expanding service offerings, acquiring new contract vehicles, rolling-up competitors to gain economies of scale and valuation arbitrage. They also shared the pitfalls to avoid when pursuing inorganic growth initiatives.
Here are some of my key takeaways from this discussion:
Identifying revenue synergies:
- If you have a strong technology platform, it’s easy to expand, including internationally.
- Be honest with yourself as an acquirer about the motivations of the seller, and identify revenue generators in advance.
- When buying a company, think about how to meld the cultures.
- Do no harm because people can and will vote with their feet.
- Integration early is important in order to capture the synergy.
- Melding cultures becomes more difficult as time passes.
- Services M&A are harder than technology M&As because you’ll need to keep most of the team if it’s a service company.
- Doing the deal is important. But, it’s the integration that’s really important.
- It gets more difficult to navigate change down the road after the acquisition.
The role of the CFO and CEO in an acquisition:
- CFO builds model to convince board that going through integration challenges is worth it.
- CEOs can generate some great deals and some terrible deals.
Integrating disparate organizations:
- With international M&A’s, integration is tricky.
- For domestic M&A’s, starting up joint projects early on is key.
Handling M&A inquiries:
- If you receive calls about acquisition, do your due diligence and research the company who is calling you.
- Ask a lot of questions before revealing proprietary information (e.g., are you doing an analysis of the market, and if so, can I get that report).
Is it a good time to buy or sell? Factors to consider include:
- Hiring freezes
- Contracting standards
- Is the program in the crosshairs of political change
- Also, watch where the companies who have access to the new administration are putting their money.
- Watch stock valuations and the bigger funds.
How do you finance a deal? Factors to consider include:
- Debt (many types of debt out there)
- Equity (last resort)
- Be creative.
- If there’s a way to have financing get lined up ahead of time, this is more attractive to the seller.
Risks to consider:
- Management Team (need a champion for buying the company, preferably one level below the CEO)
- The company must perform during the sell. If not, value of the company will go down.
- When companies are close in size, acquisition can be risky.
Assemble your A-TEAM:
- Board (use your Board as “Dr. No”)
- Internal Champion
- Management Team
- Due Diligence Team – A big risk area is in customer and market due diligence.
- Experienced management teams are usually better with scaling as a result of acquisition.
- If adding bulk is the only reason you’re buying, might not be a great idea.
- But, sometimes this is done in government contractor and software companies.
- $100 M is a good number to go public.
- Communication is critical when buying a competitor.
- Acquisition is not a strategy. It’s a tactic driven by the vision for growth.
The next ACG event on the calendar is our February monthly meeting featuring Danny Rogers, the Co-founder and CEO of Terbium Labs. Danny will be discussing the state of information security, how that market is likely to evolve, and will be providing an overview of the dark web, the anonymous black market on the internet that traffics in stolen data and other illicit goods. For additional information and to register online, click HERE.