Finding the Perfect Partner – Part Two
This is part two of a four part series about the mergers and acquisitions process from the perspective of a company on the sell-side of the transaction. However, this information is equally valuable for a company finding itself on the buy-side as well.
The typically 5-8 month process of a company sale, or a divestiture of a part of its business, can be roughly divided to four components:
- Analysis and valuation
- Identification of potential partners
- Contacting potential partners
- Deal execution
Part One of Finding the Perfect Partner focused on the first step of this process, analysis and valuation. This part of the series focuses how to identify potential partners and how to generate the market for your company. Logically, the more interested candidates we bring to the table, the more we can use the market forces to increase the price offered for your company.
Who Are We Looking For?
Potential buyers may come from a broad range of companies, and at the initial stage we focus first on potentially interested candidates, while naturally taking a thoughtful approach in order to find the best company fit. We look for degrees of overlap between the seller and potential buyer across the dimensions of markets and customer as well as products and applications. This matrix approach helps us winnow out the least suitable companies and narrow our field to a number of potentially well-matched partners.
Same Product, Different Market
One obvious place to start our search is to look for companies with high level of product or application overlap and low level market or customer overlap. These companies are your direct would-be competitors but they currently have no (easy/fast/economical) access to your geographic market, application niche or to a distribution channel you control. The fastest way for them to enter your market is to buy you, and the price they are willing to pay is directly linked to the value of the market they can gain.
Expanding the Product Portfolio
On the other, and equally interesting, end of the spectrum are companies with a high level of market or customer overlap with a relatively low level of product overlap. In sectors where the value added takes place in distribution, controlling the channel is key to profitability. Hence, the more control you wield over the “pipe”, the more product you can push through it.
Another example of this quadrant is a company looking to expand its product portfolio to a new application, or to grow the company to a different strategic platform. These potential buyers will be very interested in both the underlying dynamics of your competitive space, as well as your unique competitive advantages which will determine the value they assign to you.
Competing for Share of the Market and Profits
If your competitive space is getting crowded, the industry is no longer growing, or some of the customer, cost, or competition fundamentals are shifting, then your industry may be ripe for consolidation. This results in companies in the same quadrant of high level of market/customer as well as product/application overlap jockeying for the best position to grab market share. Only the fastest and fittest will be the acquirers, the slow ones will become targets or need to look for unoccupied niches to protect their bottom lines.
Industry Outsiders and Private Equity
The final pool of potential buyers may not be an obvious fit for your company at the current time. This makes them most opportunistic and most difficult to define. The most common example of these partners would be Private Equity players looking for a new consolidation or turn-around opportunity. Traditionally Private Equity has been seen as the bottom-fishers, not willing to pay for the synergies only strategic investors can expect to gain from an acquisition. In more recent times, however, Private Equity has sometimes been overbidding strategic investors, given their piles of cash and appetite to find good investment targets. Therefore, we always encourage our clients to keep this option open, even if it would not be their first choice. It provides valuable additional interest for your company, which we can use in the negotiation process to improve the offers.
Quality vs. Quantity of Potential Partners
Our experience tells us that a short list of 10 hot leads is worth more than a long list of 100 potential candidates. Therefore, once we have concluded the research to come up with the long list, we start the process of shortlisting, or separating the wheat from the chaff. The criteria to do this include determining the potential candidates':
- Strategic direction
- Recent tactics
- Degree of interest
- Financial means
- Valuation basis
As most of this information is not publicly available, we rely on our proprietary research and our contacts with CEOs and other key people in all the companies in our focus sectors.
In the next issue we will discuss how to contact the shortlisted partner candidates and how to attract their interest in your company.