The advantages of acquisitions
Acquisition as a strategy offers well-documented advantages, says Hanno, particularly as mature markets can lead to margins being squeezed and organisations needing size to keep up with market targets. “It’s about getting your hands on something new, whether it’s a product, technology or know-how. Alternatively, it’s access to something you don’t currently have in the market, or simply creating growth options through size. An acquisition that looks financially attractive can be much more tempting than organic growth.”
For Indian facilities management company ‘Mortice’, acquisitions have become increasingly important. Prashant explains: “In the first few years it concentrated on organic growth but then it raised capital on the London Stock Exchange. Over a couple of years it made a spate of acquisitions, including in Singapore (buying a 51% stake in Frontline Security for $2.7 million in 2015)[ii] and the UK (Office & General Group bought for £6.5 million in 2015)[iii].
“Mortice has had remarkable growth,” says Prashant. “When it floated it was a $10 million company and today it’s more than ten times that size. The acquisitions have drastically improved its bottom line as well as its top line. More importantly, the company now has the tools to keep growing and acquire new customers because it has the confidence from operating in two of the most developed economies of the world. It may venture into other emerging markets as a result.”
Don’t underestimate the challenge
For all the opportunities involved in acquisitions, there are also risks. Prashant believes companies set on acquisition as a strategy should tread carefully. “There is a lack of experience in this space. Most mid-sized businesses have never done this before and there are lots of hurdles, whether it’s valuation, financial diligence, tax structure or the whole transaction process.
Prashant points to integration as an often overlooked area. “I always say that a successful transaction is one that is signed off and then over the next couple of years meets its intended objective. The integration process is critical. There is huge debt loaded on to the acquired company from day one and you need to ensure you get your money back quickly.”
Hanno agrees: “When large corporates acquire another business, it’s a familiar process. Most of the time it will be smaller than the acquiring entity and it won’t change the identity of the acquirer. However, in mid-sized companies every acquisition has the potential to have an impact on the identity of the acquiring company. It’s not taking on a new person or developing a new product: it’s taking on a whole new entity, so there needs to be a thorough integration process.”
Take a step-by-step approach
For companies contemplating inorganic growth the first step is to define their objectives over the short, medium and long term. If the best tool is acquisition, then the company needs to decide on the level of priority – whether to go active instead of passive. “Being active means looking for the right targets,” says Hanno. “And it’s always plural because if you only look for one target then what happens if it doesn’t go ahead? You’re back to square one.”
The second step is to raise awareness that you want to acquire. “Talking about your plans to develop makes it clear that you have an active will to do something,” says Hanno. “Although, when it comes to approaching targets there is a benefit of not going direct, otherwise your name will be out there very quickly as someone with deep pockets.”
In terms of financial modelling and the ability to move, the process can only start when there is a precise target, although firms can check what types of third-party financing are available and what terms and conditions they would need to make it work. “You don’t need the precise amounts from the other party to define what level of acquisition you can afford from a pricing perspective when you look at your own future development,” advises Hanno.
Make a decision based on logic
The risks of mergers and acquisitions are outlined in a recent Grant Thornton report, Reducing risk in cross-border transactions: tips for navigating the M&A process. However, for many mid-sized organisations that have relied on organic growth to get them to the point of maturity, the risks of not acquiring are perhaps greater than those of it going wrong.
As Hanno says: “In our discussions with German mid-sized companies we frequently hear that acquisitions are expensive and risky. I say: ‘What’s more dangerous – doing the acquisition and then having the access to the know-how and dealing with the issues that come with it, or not having it?’
“Logically, it is more dangerous not to take the next step in the development of your market because you risk being left behind which may spell the end of your organisation.”
To find out more about the opportunities presented through inorganic growth, contact one of our member firm merger and acquisition specialists.