How Entrepreneurs Can Grow Through Mergers and Acquisitions

Are you an entrepreneur looking to grow through mergers and acquisitions (M&A)?  There is a lot of money out there ready to help you. But do you know how to build M&A into your skill set to make either a merger or an acquisition work for your organization? A recent Businessweek article highlighted several war stories by Vistage members about their experiences with M&A.

As an anthropologist who works with companies going through changes, and a former financial services executive who understands the M&A process from the banking perspective, I’d like to share with you some of the trends I see emerging in the market and also some of the warning signs. To make M&A work, you are going to have to be both “lucky” and “smart.”

Abundance of Money Ready to Help You Merge or Acquire

Recent research by RSB Citizens and Key Bank both independently reveal a growing availability of funding, rising interest and building demand—as well as a lot of confusion. RSB Citizens published a survey of 300 business owners and decision makers to better understand the state of mid-market M&A activity for 2013 at a time of historically low interest rates, a slowly improving economy and a retiring population of owners of firms looking to cash out. “Nearly 80% of mid-market firms say they are currently engaged in or are open to making an acquisition. About one-quarter of these firms are currently in the process of making an acquisition, while an additional 14% are actively seeking purchase targets,” according to the survey.

Even so, the RSB Citizens’ research showed very clearly that “many sellers are unsure of their value, and what the market will bear. Being underpaid or undervalued is the top concern among current and potential sellers, especially among smaller firms with between $5MM and $25MM in annual revenue.”

Key Bank’s research reflected the tentativeness of mid-market companies. As Cindy Crotty, head of KeyBank’s Commercial Banking Segment, said, “It appears the middle market wants to hedge its bets given ongoing uncertainty about significant issues such as the US debt crisis and companies’ final tab for compliance with the Affordable Health Care Act.”

Therefore, while M&A is a sound strategy for the right companies at the right time, we urge you to go slowly and think carefully about what you are trying to accomplish and how a merger or acquisition will get you there. Let’s not the pressure or passion of the moment drive you in the wrong direction.

That Makes “Go Slow” Even More Important

Let me share some stories that reinforce the “go slow” strategy. Recently, we have encountered several entrepreneurs who had gone the “buy-it” route only to discover some unintended consequences of their decisions. In one case, an office furniture manufacturer acquired a competitor when the owner was retiring. To their dismay, they realized too late that they had too much “supply” and no more “demand” than before in a market that was rather saturated. Not a good strategic decision no matter how good they integrated the two companies.

In another case, a CEO shook their heads (over the telephone of course) about how much their own experiences mimicked those we were seeing. This CEO of a family business was a restorer of used equipment and a producer of new manufacturing equipment. He had acquired a bankrupt company that was similar to his own. They kept the staff and thought it was a good fit both culturally and in terms of products and production methodologies. It took only a short moment to realize that the reason the company had gone bankrupt was possibly, if not probably because of those very people.

Another company CEO in the K-12 education market spoke about how he wanted to expand into another area of the education market. His company bought post-secondary proprietary schools. It took only a few months to realize that the due diligence was less than diligent. They fell out of the federal loan programs, had to fund students out of cash flow, and had a hard time finding other schools ready to be bought for his expansion strategy. Before long, he realized that he was in an industry that was growing but the school they bought was not going to help them grow.

Lucky or Smart Strategies?

Clearly in this current environment, both buyers and sellers need to go more slowly than ever. Success will come from a combination of “smart” thinking and “lucky” execution. You need to clearly assess:

• Purpose: why am I really doing this?  This is not a time to follow the fad or the herd.
• Promise: both for your current operation and the one you are acquiring or merging with.
• Culture: how will you integrate a merger or an acquisition? Do you know how to marry two cultures?
• People: M&A may look like it is about products, pricing and promotion. But it is essentially all about people.

Best Practices

If you want to dig deeper into the “best practices” of M&A, read Price Pritchett Ph.D.’s work. Of Pritchett’s many pearls of wisdom, the one which resonates so clearly to me is about conducting a “cultural due diligence”: “You wouldn’t think of skipping financial, legal, or operational due diligence. You should devote the same kind of effort to cultural due diligence.”

From working with companies going through the M&A process we see how people can transform two companies into a new one that is even better than either one was before. Rather than trying to figure out how to change one culture or blend two companies together, get your people to create the future company. Perhaps, the earlier you build a new company, the sooner you can really gain the benefits from your investment.

Or, copy Warren Buffet and leave your new acquisition alone to do what it always did before: grow profitably.

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