Wednesday, 8. November 2017

And Whom do we Marry Today?

In today’s era of low interest rates, the coffers of many European companies are well-filled, and what could, therefore, be more obvious than a strategic acquisition?
Consequently, increasing valuations through acquisition of other businesses is these days frequently on the minds of many European companies of varying sizes. Strategic considerations range from the takeover of competitors in the same business sector to the vertical acquisition of companies in related business sectors. The rationale behind an acquisition is widely known: A horizontal acquisition is expected, following the successful integration, to lead to the distribution of the costs of the secondary value-added processes across a greater business volume and thereby to cost degression and margin improvement.

The vertical acquisition is expected to tap into related business sectors with higher margins by leveraging existing corporate capabilities with the goal of increasing the average profitability within the company. With these or similar considerations in mind, more and more companies are beginning to search for acquisition targets. But how does one find a suitable acquisition target?

Seek and You Shall Find
Sometimes it is quite simple: The dialogue with the target company had already been established before the buyer knew that he was a buyer. But most of the time it is more challenging-requiring a search based on filled coffers and strategic vision. Such a search for an acquisition target offers an opportunity to create a map of one’s own industry, to analyze competitors and the appeal of related business sectors, and, as a result, to also scrutinize and review one’s own strategy and objectives for the acquisition – at best with the inclusion of a third party.

Most of the time, this search process starts with a more or less clear target vision of the company to be acquired. This target vision may manifest itself in the products, in the scale, in the geographic presence or in other desired attributes of the targeted company. As soon as the attributes of the acquisition target have been established, the creation of a map within the relevant competitive environment or within the relevant business sector can commence. The quality of the data involving the creation of such a map varies. The result will be-subject to the data situation-a more or less precise image of the overall population of possible target companies, from which the most suitable candidates may be selected.

Discretion, Discretion, Discretion
While the selection of possible acquisition targets will have shed light onto the darkness of the possibilities, it remains unclear if these companies and/or their owners will at all be interested in any transaction. This will raise the delicate issue of how to approach possible target companies. Such a contact entails a number of risks for the approaching party and the target company: The interested party would typically not want to disclose the information of an interest in a transaction to the marketplace-due to possible reputation issues that, depending on the circumstances, could have a more or less negative effect. Discretion is equally important for the target company, since an intention to sell can, once disclosed to the marketplace, entail a negative impact up to the loss of revenue. A target company becomes even more exposed during the later stages on the path to the conclusion of a transaction-specifically when extensive company information is disclosed during the due diligence process.

Whenever connecting factors between the approaching party and the target company already exist, it is useful to cautiously explore the interest in a transaction through these existing communication channels. If no points of contact exist, it may be advisable to assign an experienced third party to conduct and monitor this process due to the delicate circumstances of any approach. The success achieved depends on both the form and the nature of the approach as well as the interest expressed in a transaction by the owners. Quite often fewer companies than expected are interested in a transaction. It will ultimately come only then to a transaction, when both the buyer and the seller show a genuine and substantiated interest.

A Strategy is Only as Good as its Implementation

For a successful outcome, the subsequent journey from a mutual interest to an eventual transaction should be conducted prudently by both parties. The joint path to integration is the final, essential step towards success: Only through a successful integration can the realization of a strategic acquisition ultimately be assured.

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