Mergers and acquisitions are often discussed together, but the terms are not actually interchangeable.
The term merger refers to a strategic process whereby two or more companies mutually enter a legal agreement to form a new business entity. Large scale examples of mergers include the 1998 merger of Exxon Corp and Mobil Corp to become Exxonmobil, and more recently, the 2015 merger of H.J. Heinz Co and Kraft Foods Group Inc to become Kraft Heinz Company. You may also be familiar with failed examples of mergers like AOL and TimeWarner or Daimler Benz and Chrysler, neither of which managed to go the distance together.
Unlike mergers, strategic acquisitions do not result in the formation of a new company, nor do they fundamentally disrupt the operating models of the existing businesses. Acquisitions involve one business buying another, like when Google purchased YouTube in 2006. Normally a larger company makes a strategic acquisition of a smaller company that may or may not be in the same geographical area and may or may not be in the same industry.
The aforementioned high-profile examples of mergers and acquisitions can be helpful because they are easily recognized, but their scale can make them unrelatable for many business owners. At Viking, we have been assisting small to midsize business owners with mergers and acquisitions for more than twenty-five years. We have observed that true mergers are actually uncommon and quite risky because it is rare for two equal companies to mutually benefit from combining resources and staff; not to mention CEOs who may not want to give up control.
Strategic acquisitions represent a significant amount of our completed transactions here at Viking M&A. In our experience, successful strategic acquisitions focus on the following eight factors:
Synergy is a business concept based on the assumption that two companies will be more valuable together than apart. So, a focus on synergies involves purchasing a business that, when added to your existing business, results in a greater sum than the separate entities.
Integration can look like combining technology, lines of business, supply chain, etc, where the combination enhances your company’s ability to compete and increase efficiencies.
3. Economies of Scale
Economies of scale refers to the ability to eliminate duplicate costs that the separate entities both have. When combined, those duplications may be eliminated. Examples include leased space, fixed overhead, salaried positions, etc.
With the demand for labor, strategic acquisitions are often made simply for the human capital component.
Sometimes eliminating your biggest competitor by acquiring them can result in a tremendous increase in margins.
6. Diversification of Risk
Sometimes purchasing a business in the same industry, but in a different market, helps hedge against local risk. The same applies to purchasing a business in a different industry in the same local area.
7. Cross Selling
It is important to consider cross selling opportunities, or the opportunity to offer a different product or service (from the acquired company) to your existing customers, and likewise, to offer your original company’s product or service to the acquired company’s customer base.
With the right acquisition strategy, you can grow your business faster in 90 days through acquisition versus organic growth which could take years.
Examples of Successful M&A Deals with Viking
In the following real-life examples, you will notice the above eight factors.
Custom Screen Printing Company
In this deal, the Buyer already owned a custom screenprinting and embroidery company but did not have much in the way of commercial customers. They mostly served the markets of school events, sports leagues, church events, charity events, and family reunions. The Buyer strategically acquired another custom screenprinting and embroidery business whose customers were largely commercial service companies and manufacturers. The acquisition opened up a new market to the Buyer with access to a new customer base.
The acquisition included the Seller’s retail presence. The Buyer’s existing business did not have a retail storefront, and the Seller’s location was on a high-traffic road that received a fair amount of walk-in customers.
This acquisition allowed the Buyer to consolidate production capacity. The Buyer was able to move all production to their location and increase capacity and margins by utilizing economies of scale. This also allowed for the consolidation of back-office functions. By acquiring someone in the same business, the Buyer was able to reduce the overall business costs by consolidating redundant functions like accounting, customer service, sales, & marketing.
In this deal, the Buyer already owned a Toyota dealership and strategically acquired another. They already had brand synergy, and the acquisition allowed the Buyer to scale in the local market and remove competition at the same time.
Specifically, since cars have not been readily available, the Buyer knew he could grow and receive additional cars through acquisition. Toyota USA provides bonus allocation of cars to new Toyota dealers/buyers. The Buyer received an increase of 300 cars from the historical allocation. Additional cars from the increased allocation were shipped to the dealership post-closing. Going forward, the new owner will receive the historical allocation, plus 300 units, plus going forward a 3% to 5% allocation increase annually.
Harley-Davidson Dealer Acquires Boat Dealership
In this deal, the Buyer already owned 11 Harley-Davidson dealerships. He wanted to diversify, but could not purchase a non-Harley-Davidson motorcycle dealership without Harley reducing his annual motorcycle allocation from his Harley-Davidson dealerships. The Buyer found that Harley would allow him to own boat dealerships since watercraft is not direct competition to Harley. This provided the opportunity for the Buyer to diversify and grow his Harley locations at the same time.
The Buyer was also able to utilize his human capital from the 11 dealerships by offering employees advancement and management opportunities. He was able to reduce operating costs via centralized accounting and HR, and he brought in seasoned management from his pool of existing managers to implement robust sales and service processes.
Caterer Acquires Venue
Prior to the transaction, the Buyer was the primary catering vendor for this venue. The Buyer removed the risk of ever losing the venue by purchasing the facility. In addition, the Buyer secured additional catering revenue from this venue that alternate catering vendors had been receiving from Sellers.
Here, the Buyer owned a wholesale furniture business. The Buyer strategically acquired an outdoor furniture seller, taking advantage of the opportunity to expand to another key market.
In this transaction, the Buyer actually owned the exact same company in another city across the country. This acquisition allowed the Buyer to grow while diversifying and hedging against local risk.
Commercial Cleaning Company
A large commercial cleaning company acquired a business that provided the same and complimentary services, but in a new market. This acquisition proved strategic for the Buyer for purposes of not only cross selling and growth, but also talent, competition, synergies, and economies of scale.
When looking at examples of mergers and acquisitions, be sure to consider the above factors for success. When you know what to look for, it becomes clear why some mergers are successful and some are not. It also becomes clear why successful examples of mergers are less common than successful strategic acquisitions.
Are you considering a strategic acquisition? At Viking M&A, we have worked with Buyers and Sellers on over 700 deals over the past 25+ years. We are here to help you achieve the best result for you and your company. Contact us today for a complimentary consultation.