News and Insights on M&A for the Middle Market
Should you acquire a company or develop your own solution? This is a question many leaders wrestle with when considering the best path forward for their company; however, there's no one answer since every company's situation is unique and each approach has its advantages and disadvantages. Let's take a moment to explore these two pathways in more detail.
Building Your Own Solution
When it comes to growth, most are familiar with organic growth, which is growth through adding more customers, selling more products, investing in research and development, or developing your own solutions. At its heart, organic growth is business as usual and is a vital part of a company's success. Organic growth tactics can be used to accelerate an organization's development, and there are many benefits to this approach:
1. Familiarity — Most business leaders are more comfortable with the concept of building a solution internally than with pursuing an acquisition. Already having an understanding and experience of undertaking the task internally makes it easier to embark on this path.
2. Fully customizable — Developing your own solution means you have total control and can fully customize it to your specifications. Building a solution is especially beneficial when no other company exists that suits your strategic needs.
3. Avoid negotiations — There's no need to negotiate with an owner of a company since you will be building the solution from scratch. Convincing an owner to sell and moving the process forward can be a headache if you do not have experience dealing with owners.
4. Financial cost — The initial cost to building is typically less than an acquisition. However, cost is truly relative to the situation. While the price tag of an acquisition might seem large, the cost of building a solution might be similar or even more once you factor in the time it takes to develop, as well as the outside expertise that may be needed.
On the other hand, there are some downsides to building:
1. Slow — Perhaps the biggest drawback to going it alone is that it takes time to develop a solution, and even longer to acquire customers and gain the necessary market share that translates to boosting your company's growth.
2. Lack of expertise — You may lack the in-house expertise required to create and expand into a new market. In some cases, you may be able to quickly get up to speed, but in other cases, it can be incredibly difficult to master the necessary skills, so you may need to consult an outside advisor for help.
3. Bumps in the road — It's common to face a few setbacks and challenges in any new business endeavor. Hopefully you'll weather the bumps in the road and quickly move on to smooth sailing.
Acquiring a Company
Many companies are intimidated by acquisition because they think buying another company is just for the Microsofts and GEs of the world. The truth is, buying can be a successful tactic used by any company in any industry regardless of size. An acquisition doesn't have to be large or flashy in order to be successful, but it should be strategic in nature. Acquiring has many advantages including:
1. Speed — One of the biggest advantages of acquisition is that its fast. Acquiring allows you to leap frog the development cycle, reposition your company, and accelerate growth. In today's environment, where the world is rapidly changing, moving swiftly can be the difference between success and failure.
2. "Ready-made" — In buying another company you are purchasing a ready-made solution which immediately gives you access to new markets, employees, ideas and technology once the deal closes.
3. Pick winners — Many new businesses and new ideas fail, but with acquisition, you can select companies that have already proven themselves to be successful. You can also avoid the pains of a startup since someone else has already weathered the ups and downs of a new business and figured out the kinks.
4. Gain expertise — You can bring critical knowledge and capabilities in-house through acquisition. You may need access to key leaders, decision makers or a specific kind of technology in order to take your company to the next step of strategic growth.
Acquisition is not without its faults and is not always the best solution. Here are a few drawbacks to think about:
1. Expensive — Buying a company can be expensive. In addition to paying the owner, you'll need to hire lawyers, accountants and an M&A advisor to ensure the deal is a success. While the results of an acquisition are impactful, for some, the up-front costs may be too great.
2. Complex — Buying another company is a complex, time-consuming process that most are unfamiliar with. There are many moving pieces, from developing an initial strategy to negotiations and valuation to integrating two work forces. All parts need to move in harmony in order for the deal to be a success.
3. Risk — About 77% of acquisitions fail. Acquisitions fall apart for a number of reasons, such as lack of strategic rationale, disagreements over valuation or integration challenges. Although acquisitions can be risky, fortunately, there are ways to mitigate the risk by following a carefully laid out strategic plan. In addition, any business leader understands there is no reward without some measure of risk.
Take some time to review each of these pathways as you contemplate your company's needs, expertise, timing and finances. In some cases, you will find acquiring is the best option, while in other situations you may choose to build your own solution internally. While there is no clear-cut choice, it would be a mistake to exclude one option without consideration. Proactive leaders should evaluate both options in parallel in order to make the best decision.
Do you have questions about acquisitions? We would love to hear from you so we can discuss your ideas in future editions of the M&A Growth Bulletin. Contact us at 703-854-1910 or Growth@CapstoneStrategic.com.
Amazon acquires Whole Foods
The $13.7 billion acquisition gives Amazon 460 Whole Foods stores, allowing the ecommerce giant to break into the grocery industry and expand into physical retail locations.
Walmart buys online men's fashion retailer Bonobos
The $310 million deal is part of Walmart's push to build up its ecommerce business to compete with Amazon.
Staples sells to private equity
Faced with increasing online competition and declining sales, Staples will sell to Sycamore Partners for $6.9 billion. Staples attempted to merge with Office Depot, but the deal was blocked by regulators.
Don't forget to ask "Why?"
Many executives don't take enough time to think about the "why" of acquisition.
They focus on conducting research, identifying targets, negotiation with owners and valuing companies and gloss over these grounding questions.
But the foundation of every successful acquisition lies in your strategic rationale. Without this foundation, it's impossible to guide your endeavors.
As you embark on acquisition, don't get so swept up in the excitement of a deal that you forget to answer this basic question:
Why are you interested in acquisition?
The latest events from M&A U™
Tax Considerations in M&A — Tax implications can significantly alter deal structure and even the price of your acquisition, so it is important to understand their effect.
1 PM EDT – July 20, 2017
CPE credit is available.
Keys to Integration Success — The closing of a deal is the fruition of months of hard work. Learn how to successful plan and execute the integration of two companies.
1 PM EDT – Aug 22, 2017
CPE credit is available.
Mastering Valuation for M&A — Valuing a company is an important part of M&A. Learn core concepts around valuation and demystify key terms and processes.
1 PM EDT – Sept 21, 2017
CPE credit is available.
|Previous (Spring 2017)||Bulletin archive||Next (Fall 2017)|