Wednesday, April 15, 2009

How to Make Acquisitions in a Down Economy

How to Make Acquisitions in a Down Economy

Impulse shopping is rarely a good idea—especially if you're buying a business. But you shouldn't overlook the importance of serendipity, either. The declining economy has left a raft of formerly solid businesses in distress, making it the right moment to consider whether an acquisition might make sense for you. With company performance—and therefore valuations—suffering, a recession can be an opportune time to buy. "It's a great time to be a careful buyer, which is not an oxymoron," says Eric Siegel, president of advisory firm Siegel Management in Bryn Mawr, Pa.

Just ask Larry Browne, chief executive of Houston-based freight forwarder Diligent Delivery Systems. In March, Browne closed on the acquisition of a four-person courier business in Memphis, opening up a new market for his own company. Acquisitions aren't new to Browne—he's made nine since taking over Diligent in 2001. He's still raring to go. "The opportunities were there last year and are here now," Browne says. "I'm feeling good about '09. We're going to do some deals." His company now has 72 employees and about $40 million in sales, up from less than $1 million in 2001. Browne attributes 25% of his company's growth to acquisitions.

There's more to successful deals than price and timing, of course. Any purchase needs to complement your business strategy and your plans for internally generated growth. Whether you're actively seeking out a deal or one falls into your lap, you'll need to know how to maximize and integrate the new assets before moving forward.

In the best-case scenario, an acquisition would improve your company's profitability and margins and provide dramatically better return than you would get plowing the same money and sweat into organic growth. You should be able to wring some cost savings out of the integrated operation—rarely as easy as it sounds. Alternatively, an acquisition could be a good defensive move, or could raise barriers to entry for competitors.

It's vital to understand exactly what you will need to get out of a purchase, whether it be cash flow, employees, customers, real estate, equipment, or technology. Be wary of buying a business that you suspect will complement yours but that you don't fully understand. Just because you make a great peanut butter doesn't mean you can successfully produce jelly.

And while many stellar companies may be temporarily cheap, the reverse isn't necessarily true. If the seller is desperate to get out, there's probably a good reason. Likewise, if the reputation of the company has been battered, or if it's difficult to get good financial information, walk away. Then there's this catch-22: While the recession has made plenty of companies newly available, it has also made it much harder to find financing. If you don't have cash on hand, you'll need to find a seller willing to accept a lengthy payout or shares in the merged company.

For the ready buyer, though, options abound. Nearly every industry has been affected by the recession, and those that rely on discretionary spending—real estate, luxury goods, and restaurant companies—may make for particularly rich prospecting.

Sound good? First, confirm that you have both the dollars and the management resources to tackle an acquisition. Once you have a target, you will need to scrutinize the other company's finances, customers, legal standing, and employees. Then consider the structure of the deal and whether it should be an asset or a share sale, which can significantly affect the price. And remember: Just because it's on sale doesn't mean it's a good deal.


An acquisition will put significant pressure on both management and finances, so evaluate yours before going on the prowl. "Your own operations should be very routine so that management has the flexibility to focus on the deal," says Siegel. You don't want to leave your core business struggling while you're playing wheeler-dealer.

Making certain that your balance sheet is solid is critical. The best tactic for a strategic buyer, experts believe, is simply to rely on cash.

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