It is inevitable that a prolonged period of becalmed economic conditions will see some businesses fall by the wayside. But others are able to step up to the mark undeterred and push for growth – be it organic or acquisition-based. We've taken a closer look at how to take a successful approach to achieving growth through acquisitions, even in a tough economic climate.
The latest GDP predictions from the Office for Budget Responsibility showed that the economy is set to grow at a slower rate than had previously been forecast (0.6 per cent this year, rising to just 1.8 per cent in 2014) and it looks like businesses will have to continue to work hard if they want to see any growth in the coming months. In an attempt to stimulate growth, last month's Budget saw Chancellor George Osborne announce a number of measures that should bring positive results for enterprise. These included cuts in the UK's corporation tax and an extension of the capital gains tax holiday for entrepreneurs and investors. Despite this, some companies have continued to level criticism at the Government that it isn't doing enough to boost the economy, blaming this for their inability to expand.
But the wiser among the business community aren't wasting time throwing around excuses; as JC Penney said, “Growth is never by mere chance; it is the result of forces working together.” While it's clear that there are certain forces working against entrepreneurs, this adage still rings true. Shrewd business operators realise that there are still a lot of factors under their own control and they're chasing growth and development by any means possible.
In business, growth can be generally divided into two forms: Organic or acquisition-based. Which one a company pursues will depend on individual circumstances, but the crucial thing to think of initially is the time-scale of growth. Inorganic or acquisition-based growth is an accelerant strategy, but carries high risks.
Organic growth tends to be a more gradual process; it allows a business to monitor and reconsider its path as things develop. This makes it something of a 'safe' option, as it's easier to keep the pace of growth under control.
Netscape is a classic example of a business that has enjoyed some fantastic successes off the back of organic growth. Under the guidance of its founders Jim Clark and Mark Andreessen, the firm managed to grow from its start-up roots to a company with 3,000 employees and a revenue of $500 million in just four years by scaling up. Netscape employed people with strong skills in aggressive marketing investment, product development and support to help it push forward with the development and distribution of its browser, which held the dominant market position at the time. By 1998 the company had been acquired by America Online for $10 billion and while it was to lose its dominant status in the first round of the browser wars to Internet Explorer, the founders still enjoyed very healthy returns on their investment before Netscape was absorbed by its new owners to play its role in America Online's evolution.
But Netscape's approach won't work for all businesses and to achieve such a rate of expansion through organic growth requires dedication and high levels of investment. It is also doubtful whether the current economic climate would allow fast-track economic growth in any sector right now. For companies that have a clear vision of where they want to be and when, scaling up through acquisitions can be a suitable alternative, especially when there is a set goal in mind. Of course, the most profitable route is not always the safest, so it is essential to keep in mind that this tends to be a riskier strategy for growth and one which requires careful and constant monitoring and reviews to ensure that it is a success. However, so long as you make and stick to a clear plan, growing through acquisitions can be one of the most profitable routes to expansion, especially during difficult economic times when distressed businesses can be acquired for much lower prices.
Specific tactical acquisitions have some of the highest success rates for stimulating growth, and involve snapping up a particular technology or service that fills a gap in a company's own arsenal. Finding exactly the right business can become a time consuming and elusive goal, although services like the Business Sale Report can provide you with significant assistance and contacts to help boost your chances. Be specific about the type of company you want to target and prepare a detailed acquisition mandate. Remember that should be an obvious synergy between your company and the target.
But taking a broader approach to growth, there are three key options for an acquisition strategy: Vertical acquisition, horizontal acquisition and umbrella branding. There is no such thing as a 'best option' due to the potential for variation in circumstances, but below is a brief overview of each option that should provide some guidance when weighing up strategic objectives and the balance between risk and reward.
Vertical – A vertical acquisition strategy involves buying businesses further up or down the supply chain. For example, a company that manufactures car tyres might buy a supplier that sources and refines the raw rubber material. When successful, this approach can deliver cost reductions by increasing scale and reducing risk. Be careful not to venture outside your core competence zone however, and pinpoint a real and defensible reason to diversify.
Horizontal – While vertical acquisitions involve jumping up or down the supply chain, a horizontal acquisition strategy focuses on expanding a company's presence on its existing rung. This allows for a rapid expansion of customers, reductions in costs through scale and an increase in market power. However, this approach to growth through acquisition will require a very careful hand with cultural integration. Horizontal acquisitions tend to fail when two or more businesses don't integrate due to different outlooks and attitudes; careful staff management is key to success with this approach to growth.
Umbrella branding – The umbrella approach is almost entirely dependent on the kudos inherent in a specific brand. It tends to be better suited to larger businesses that have a stronger level of brand awareness, but some smaller niche businesses might find that it can also work for them depending on their reputation. Essentially, umbrella branding involves diversifying a company and expanding into new services or products on the strength of an existing name.
Costain, a British civil engineering firm, is one business that has managed to implement a successful horizontal acquisition strategy. Following extensive planning in 2010, the company acquired Promanex, an industrial support services business, in 2011. The decision to buy was designed to help meet the growing needs of Costain's customers. 2011 also saw the business buy Aberdeen-based oil and gas engineering consultancy ClerkMaxwell, which was said to be "the first tangible result" from the 2010 decision to "seek routes for non-organic growth for the company".
The success of these previous acquisitions has prompted Costain to continue its approach to growth and the firm has recently announced that it is to acquire May Gurney Integrated Services plc as part of a merger deal. The firm is to buy the road maintenance provider at a value of around £400 million, after May Gurney had experienced something of a troubled year financially.
These carefully considered acquisitions have helped Costain to secure a £2.4 billion order book, with repeat customers accounting for around 90 per cent of this. Furthermore, its shares are trading at 7.1 times 2012 earnings, suggesting that the company has put itself firmly on the path to growth, while others in its sector have fallen victim to spending cuts.
It is very important that before embarking down the inorganic growth path that the key reasons for making an acquisition have been identified and that alternatives have already been considered. Understand the time demands that an acquisition will make and don’t underestimate the cost of advisers, who are always necessary, by the way. Never cut corners with due diligence, whether financial or legal. Watch your cash and prepare a financial model, including forecasts, for the combined business. And don’t forget other areas like Intellectual Property and pensions.
When the economy eventually stabilises, it isn't going to be those that have sat back and made their excuses who will be on top. Brave company leaders that have a clear vision of where they want to be and when, are refusing to be held down. Many of them acknowledge that, difficult as it is, growth through acquisitions can be an efficient and effective way of achieving goals and expanding. It will be these business owners that will make their mark and meet the ever-evolving demands of a global economy.
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