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"All the Right Moves"
"Examine Growth Strategies"
"Is Your Strategy at Risk?"

ALL THE RIGHT MOVES

Food industry merger and acquisition activity remains strong. But not every M&A story ends in success. The key to victory: a proactive process.

By Dick Albu, President, Albu & Partners Inc.
As seen in Food & Beverage Magazine, February 1997 edition

By definition, a good acquisition made at the right time in a company’s life cycle can propel a business forward. It can significantly accelerate sales and earnings growth, strengthen existing capabilities and correct weaknesses. Acquisition should be on every successful, growing company’s agenda. However, in today’s competitive merger and acquisition (M&A) environment, your approach, experience and commitment to the acquisition search process will decide the difference between success and failure.

There are fundamentally two ways to approach acquisition initiatives: opportunistically or proactively. There are significant differences between these two methods. Although both are used successfully by strategic buyers and M&A experts, the proactive approach offers greater control of the overall process, and will increase your odds of success.

“Opportunistic” Acquisition Search

The opportunistic approach is a generally acceptable practice. It is low cost because resources are only employed when and if an interesting acquisition candidate comes to your attention. A common method used to identify a potential acquisition candidate is word-of-mouth advertising. Simply put, the company informally or formally announces to its network of contacts, including people in the M&A community, suppliers and customers, that it is interested in acquisition. In addition, companies often sign “finders agreements” with business brokers and investment bankers, agreeing in advance to a success fee if they close on a property. These agreements can be effective in motivating your network. Obviously, the level of activity generated will depend on the time and resources you commit: to maintaining contact with your network; to keep it enthusiastic; and, the effort made to continuously broadening your reach.

As acquisition candidates are presented to your company by the network, you can react positively or negatively based upon each candidate’s strategic value. Remember that your network is working on a contingency basis, which means they are paid only if you close on an acquisition. Therefore, you should expect that most network contacts, for all practical purposes, will pursue the avenue of least resistance, and put forth the least amount of work. Although you will clearly communicate your acquisition strategy, they will often present ideas that may only be remotely appropriate for your business. It is your responsibility to screen each prospective candidate. Keep in mind that, if rejected too often, a network contact will lose interest.

In the case of a mid-West $100 million frozen foods company, the opportunistic approach has proven quite successful. They have one dedicated person whose soul purpose is to stimulate and motivate a “network”. Over about ten years, this company has added both retail brands and food service product lines to its portfolio of nationally distributed frozen foods.

"Proactive" Acquisition Search

Alternatively, a proactive approach to the acquisition search should increase your odds of success. It is important to recognize that the proactive approach will require a greater commitment of resources. It should, however, be more rewarding because you are in control of the entire process. You develop a comprehensive list of potential acquisition candidates that best fits your strategic needs. From the comprehensive list, you select priority targets that best fit your acquisition strategy. You commit resources only to those targets that have the greatest probability of success. Finally, since your priority targets are not necessarily known to be for sale, by proceeding, you could preempt competitors and begin negotiating without having to compete for attention.

Keep in mind that you can simultaneously consider pursuing the opportunistic approach to acquisition with the proactive approach. By doing so, properties coming on the market will be brought to your attention, and you can screen out the properties that do not meet your acquisition strategy guidelines. Importantly, you can be more selective in the quality of your outside network, and more discrete in your approach.

It is important to remember not to be too rigid in your approach or you may inhibit creativity and spontaneity. Briefly, the search process should evolve as follows:

1. Define the acquisition strategy and establish the guidelines for selecting the most attractive acquisition candidates. This is a critical step in which you establish the goals you wish to achieve through an acquisition, and you describe the criteria for selecting the ideal acquisition candidate; one that will produce the greatest value when assimilated by your company. The guidelines include transaction size, financial considerations, technology, sophistication, management, market position, and any relevant parameters which will help you screen out undesirable candidates.

2. Develop the comprehensive list of potential acquisition candidates. At this point you want to be sure not to miss any interesting candidates. Your list should be as exhaustive as reasonably possible, and candidates should be considered based upon how well they stack up against your search criteria. Do not be concerned whether any on your list of acquisition candidates are known to be available. Availability, or probable availability, will be decided later in the process.

3. Gather top line information on each potential target and eliminate or set aside candidates that do not meet the guidelines outlined in the acquisition strategy. During this phase, do not wait for volumes of data. It is better to err on the side of less data. Your objective is to quickly screen the comprehensive list down to a short list of priority prospects based on desirability, or best strategic fit.

4. For each priority candidate selected, prepare a business profile and develop the approach strategy. These profiles will verify your assumptions regarding desirability, and aid in the development of approach strategies. An approach strategy is defined as the business rationale why the potential seller would consider divestment. It also identifies the key decision maker within the company to be contacted. Your research efforts in this phase should go beyond information available in the public domain. Interviews with suppliers, trade associations, customers and ex-employees, will give you an inside-out view of the target company’s strengths, weaknesses and goals. We highly recommend you work with a qualified external resource experienced in proactive acquisition search to assist in this stage. A third party can more easily gather information than your employees, and you avoid revealing your company’s intentions before you are ready.

5. Using the approach strategy, contact each priority candidate. The initial contacts must result in a personal meeting with the key decision maker identified in your research. The objectives of the initial approach are to check and enhance your information base; test the viability of the approach strategy, and gain agreement to begin discussions between your two companies regarding the possible acquisition. Once again, the initial approach should be made preferably through a qualified outside resource experienced in proactive acquisition search. In addition to not revealing who they are representing until the target expresses serious interest in your proposal, an experience outside resource can be perceived by the target as an intermediary between the two companies, and, therefore, can provide you with important feedback during serious negotiations.

The key to success in bringing candidates to the negotiating table is the preparation and implementation of the approach strategy. Insights into the management, ownership, performance and strategic plans need to be gathered from a variety of sources, including personal interviews with people familiar with the target company. If a compelling rationale for the proposed acquisition can be developed and accurately presented, the odds of attracting the potential seller’s attention will increase significantly.

During an approach to a family owned, regional specialty foods company, we confirmed our belief that the brothers were in disagreement about the company’s future and were not going to resolve the problem alone. Our approach strategy offered them a buyout strategy allowing one of the brothers to stay on as General Manager of the business. They had not seriously considered divesting the business until we came in with our proposal. Once a trust relationship was established, negotiations were held without the interference of other potential bidders.

In our experience, when using this proactive acquisition search process, about 30% to 40% of companies initially approached will commit to a first meeting with the potential buyer. After the first meeting, about 20% to 30% of candidates will agree to enter into serious negotiations. Once negotiations begin, a more comprehensive business assessment (due diligence) will be allowed by the target company.

Six Practical Principles

If you decide to approach your acquisition search initiatives proactively, there are a few simple principles that you should keep in mind. By applying these principles, you should increase the level of enthusiasm in your acquisition team, and cause everyone involved to be realistic and practical in their approach.

1. Do more target-by-target strategic thinking up-front, and less quantitative analysis. Do not substitute data for insights and ideas about the internal issues, concerns and goals of the target company. This type of information is critical in defining a creative approach strategy which will increase your chances of success.

2. Employ a qualified, seasoned outside resource to extend your reach, add to your information base and enhance creativity. As an extension of your management team, an outside resource should expand your ability to gather information and uncover creative approach strategies. In addition to keeping your acquisition initiative confidential; a qualified outside resource will also help you avoid premature disclosure of your intentions to prospects, and, in competitor-to-competitor situations, avoid confrontation.

3. Have at least three serious targets at all times. This not only increases your objectivity and bolsters your confidence as a negotiator, it accelerates the process.

A $300 million foods company had identified, approached and begun negotiations with four prospective acquisition candidates. The company’s President decided to focus all her resources on a merger with one of the candidates, shutting down discussions with the other three prospects. Six months later, negotiations with the potential merger candidate broke down. The company had lost a deal they had put a great deal of energy behind, and the contacts at the other three candidates, shut down six months before, had grown cold. As a result, her organization had lost momentum and the acquisition team’s morale needed to be repaired.

4. Approach the right person in the target company. This is not necessarily the most senior officer. Secure the support of the decision maker and he/she will help influence the rest of the organization. Never approach people that might be negatively affected by the decision.

In a typical example of the wrong approach strategy, a multinational corporation had identified a small division of a competitor as a potential acquisition candidate. Without an approach strategy, the Chairman decided to call the President of the target’s parent and ask if he would consider divesting one of his divisions. Caught off guard, the President said no. Through further investigation, we discovered that the division was acquired under the President’s leadership. Although the division was performing poorly, the President felt accountable for its failure. We also discovered that the President’s direct reports felt differently about this division, and were quietly searching for a potential buyer. By calling the President prematurely, the Chairman had cut out the key decision makers within the President’s organization that could have helped influence the decision. If the original approach had been made to one of the President’s direct reports, we would have secured their support in selling the President on the sale of the division, and significantly increase our odds of success.

5. Be realistic, flexible and opportunistic in your approach to prospective candidates. Do not seek perfection in the process. Be prepared for surprises and ready to move quickly on new opportunities.

On behalf of a multinational confectionery company, we made an approach to a privately held $30 million sugar confectionery company. During our personal meeting with the President, we uncovered that the majority owner, an equity investment firm, was under pressure to divest several of its businesses. Moving quickly, we arranged a meeting with the owners, and were able to negotiate the acquisition without competition.

6. Acquisition search is an ever-changing process. Keep the process alive and moving. “Stop and Go” searches tend to present a picture of uncertainty and, sometimes, reflect a measure of indecision of your management.

A final point that is critical to the success of either opportunistic or proactive acquisition search; although the day-to-day business development responsibility can be delegated to a senior officer of the company, the CEO must play an active roll in all aspects of the process. Success depends on his/her complete support, participation and commitment to success.

The M&A market is an intense competitive arena, and the inventory of good properties is not infinite. For every successful acquisition, there are thousands that failed. One solution is to work proactively on acquisition candidates who present the best strategic fit with your company’s long term goals.

Link to next article:
"Examine Growth Strategies"