The Ten Types of Successful Acquisition

If you are embarking on a takeover that simply fulfils a strategic purpose such as ‘growth’ or ‘expansion’ then you may struggle to generate tangible return on your investment. This is not the time to be anything other than precise and single-minded about why you want to buy a certain business and what you hope to achieve.

Finding an acquisition that fulfils one of the below ten acquisitions ‘types’ is your first step to success when looking to buy a business. If your target purchase does not fall into one of the following categories, then think again. This might not be the deal for you.

1. Consolidation within a mature industry
If you are operating in a mature industry that has excess capacity, buying up a rival can be a sensible approach when looking to improve conditions for your business. This can happen in a number of ways. Specifically, buying up a rival to increase the size of your business can strengthen its position if you need to then find, along with others in your industry, that you need to reduce supply in order to stimulate demand.

Another way that an acquisition can lead to a reduction in excess is when it results in more indirect consolidation in spheres such as sales and R&D, which can help your business to add value.

2. Boosting the target business’s performance
If you believe that you can significantly increase the operating profit of the business you want to buy, then this is as good a reason for buying as any other.

Successful buyers can boost revenues in their target companies in several ways, but clearly identifying costs that can be cut is a primary factor in many of the most successful acquisitions that fall into this category. In fact, this is a common tactic in private equity purchases.

If you find the right target and identify effective ways to cut costs and boost margins, you can generate profit growth without making major investments or further acquisitions.

People who do this successfully tend to opt for businesses with low returns on invested capital (ROIC) and low margins, as these are easier to transform in terms of performance than those with high ROIC and high margins.

3. Target a business with scalability that is industry specific

If you find a business that can offer you economies of scale that are specific to your industry and are not just generic, it might be a good idea to buy. Consider first whether combining your business with another will actually generate economies of scale or whether you are both already running at scale and there is little to actually be gained.

The key to a successful acquisition based on economies of scale is to identify whether the target can make a particularly pricey part of your process significantly cheaper, or whether you can generate economies of scale by purchased a much smaller business that doesn’t cost the Earth.

4. Identify a business with potential early on

Identifying a business that is operating in the early stages of the lifecycle of a particular product or industry, and helping it to develop within that burgeoning field, is another winning formula to apply to an acquisition.

It is, of course, another favourite acquisition strategy for private equity investors but can just as easily be adopted by private buyers with an eye for a business with potential. If you’ve ever watched Dragon’s Den, you’ll be familiar with this approach: the Dragons are looking for something special when they decide who to invest with. This could be a cutting-edge platform, or a brilliant product idea. Equally, it could be about the management talent or a business’s position in a fast-growing market.

The secret to success isn’t set in stone but if you can pick a winner early in its lifecycle, or the lifecycle of the industry, acquisition success can be achieved. However, this usually relies on the following:
Making early investments - which can be risky
Having the talent and expertise necessary to develop your acquisition

5. Rolling-up strategy

This approach involves the consolidation of markets that are suffering as a result of being extremely fragmented. The UK car dealership market is an example of how smaller dealerships have been quickly acquired by larger operators in a large number of deals over the past few years, with many individual sites becoming more profitable as a result.

The recently published Cox Automotive Industry Report found that most car retailers expect around 10 per cent of dealerships to close this year. Others will be purchased and rolled into larger businesses in order to survive.

Cox’s customer insight and strategy director, Philip Nothard, explained: “What’s clear is that consolidation is a method of improving efficiency, the number of dealerships may reduce, but what will emerge are stronger businesses that are better suited to the market.”

Another sector that is being seen as ripe for consolidation is the wealth management advisory market. Faced with a static domestic market, and an increase in regulatory and compliance costs, firms are finding it nigh impossible to grow organically, which is why we are seeing the larger, cash-rich firms pick over their smaller competitors.

6. Buy cheap or distressed
Finding a business that is a bargain can obviously be a great strategy for a successful acquisition, providing you have the expertise required to increase its value. Finding a bargain isn’t always easy, of course, but purchasing a distressed business - and even one that is in administration - can be a good way to keep acquisition costs down.

This approach is particularly lucrative for those with turnaround expertise as well as specific skills and experience in the relevant industry to change a failing business’s fortunes.

7. Identify a business whose product you can help accelerate to market

Smaller businesses often come across challenges when trying to reach the entire market for their product. If you have the distribution channels and relationships already in place to expedite the process for a target business, then an acquisition could be a lucrative move.

Having an experienced and sizeable salesforce in place can also help a target business’s product reach its potential market more quickly and effectively.

8. Identify a target that provides valuable tech or skills
This is, perhaps, one of the most popular and commonly successful acquisition strategies used today. This is partly down to technological convergence, which is seeing technology infiltrating almost every industry. Businesses are striving to get technology on board that can help them to compete.
Taking over a business that provides you will essential skills is also a sensible strategy. Growing these skills from scratch when moving into a new market, for example, takes time and money and an acquisition may actually represent better return on investment.

In June 2019, Bath-based digital media buying agency SearchStar was purchased by a subsidiary of a US firm, Welocalise Inc, in a deal clearly driven by a desire to bring a great management team and Managing Director and founder, Dan Fallon, on board. James Worrall, of Royds Withy King, who advised the buyers on the deal, said: "SearchStar is a fantastic example of a successful entrepreneurial business that has been built up around a top quality leadership team.”

9. Consolidation to change how competitors behave
It is possible, in some cases, to make acquisitions that consolidate an industry sufficiently to encourage competitors to stop price wars. This is a tough strategy to get right, as consolidation rarely actually changes pricing behaviour among competitors unless the consolidation takes the number of businesses in an industry down to just a handful of companies. Even then, new entrants can still come along and offer lower prices in order to grasp some market share.

10. Embark on a merger that positively transforms both businesses
The success of this strategy all comes down to whether the management teams can execute the merger and the resulting transformation. Success also depends on having just the right set of circumstances to enable to facilitate the transformation.

Mergers are often the reserve of larger businesses, but smaller operators can take inspiration from major deals, such as Whole Foods and Amazon’s multi-billion dollar merger last year. In the first year following the deal, sales at Whole Foods were up 19 per cent, with new customers using the health food stores for the first time thanks to the brand being opened-up to more mainstream consumers. In exchange, Whole Foods shoppers were increasingly using the Amazon site to make purchases.

The above strategies are there to remind anyone embarking on an acquisition that they need to think long and hard about their precise goals and how the deal will fulfil these goals. It’s quite possible to achieve success when buying a business, but those who have a clear plan, that includes a well-researched and thought-out strategy have a far better chance of pulling it off.

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