M and A Premium capacities
“Strive not to be successful, but to be worthwhile.” – Albert Einstein.
Acquisition can become a tempting component of your business growth strategy in times of slow organic growth. Yet research consistently indicates that more than half of M&A deals create no value; basically most of the time this comes down to the flip of a coin.
It can be tempting to wait for an outside advisor to come up with the right deal, but by the time the proposal book arrives, it’s probably too late. Given the high stakes and risks associated with mergers and acquisitions, investing the time, money, and organizational focus of senior executives to help overcome the various challenges of M&A-driven growth, prior to any particular deal , must be amortized several times.
Although each M&A approach contains elements that are unique to the company or industry and not every company aims to become a serial acquirer, Danaher’s kaizen-like approach, from search to purchase to integration , provides insight into a variety of best practices it has refined over the ~ 400 acquisitions it has made over the past 35 years.
Danaher, a manufacturer of industrial products and hand tools, operates more like a holding company that buys and creates companies. Until his latest deal (the $ 13.6 billion acquisition of Pall in May 2015, twice the size of his largest previous purchase), his focus had been on mid-size acquisitions that are then systematically exposed to his excellence. operational. As a result, its member companies have become leaders in the B2B category, consistently offering high-quality, reliable products and solutions in what would otherwise be a diverse group of professional, medical, industrial and commercial companies. This caused the total return to shareholders of the company to increase by 70,000% since the early 1980s compared to 5,000% for the S&P 500.
So what explains Danaher’s ability to consistently generate successful purchasing growth when so many other companies stumble?
1. An investment thesis that takes into account the operating base of the company, its current context and economic realities. It goes beyond generic strategy statements like “strengthen our Asian markets” to identify how the company will compete and create value over time, for example, why us? because right now? How do we get there?
A good investment thesis should be specific enough to clarify where the company wants to increase its exposure, that is, where it should proactively look for transactions to avoid “me too” or off-strategy transactions that are unlikely to add value. .
Danaher has a rigorous system for identifying and bidding on potential acquisitions. Look for industrial brands with at least $ 1 billion in sales and a 5% annual growth rate in an attractive market niche like environmental control or manual tolls, with no exceptional competitors. There should be a clear potential for margin improvement.
two. Clearly defined M&A principles. Danaher has implemented a structured end-to-end process, from hiring to integration, supported by a short list of principles designed to reduce the time and cost of the M&A process.
Using these principles, Danaher focuses its attention on the issues that matter most at every stage of the transaction process. For example, during due diligence, you develop a short list of key factors that break business deals early and focus most of your efforts on resolving them. During the bidding, he calculates an “exit” value to ensure that the company does not overpay for the deal.
3. Experience that creates value for the acquired business – in Danaher’s case, operational improvement. One of the first Danahers acquisitions, Jacobs Vehicle Systems, a brake manufacturer, had begun experimenting with a Toyota-style lean manufacturing system. It worked and Danaher began implementing what became known as the Danaher Business System.
Through this systematic process, Danaher can quickly reap the benefits of commercial acquisitions by reducing costs and expanding margins. It uses a unique set of continuous productivity improvement tools that has evolved over time to include a large number of business activities, such as research and development, merchandising activities, and plant, supply chain, and backroom operations.
For example, Gilbarco Veeder-Root, a leader in point-of-sale solutions, and Videojet Technologies, which makes coding and marking equipment and software, saw their margins improve by more than 700 basis points after their respective acquisitions.
Four. Active portfolio management and capital allocation. Danaher has continually rebalanced its portfolio by buying new companies and divesting old manufacturing companies or companies that had become irrelevant to its broader portfolio; Its largest divestment was APEX Tool Group, which sold to Bain Capital for $ 1.6 billion in 2012. Danaher has moved 66% of its capital into new businesses since the 1990s.
It also aggressively manages the allocation of your capital between your current and new business or investment opportunities, based on your potential for growth and return on invested capital. Surplus capital is sent where it is most productive, and all investments pay for the capital they use.
In recent years, its attempt to devote more resources to large acquisitions of science and technology companies has led its industrial units to rely more on organic growth. To remain the ultimate machine for doing business, Danaher recently announced its intention to split its business in two: a growing science and technology company that will retain the Danaher name with businesses in diagnostics, water treatment, dentistry and health science. life and $ 16.5 billion of revenue in 2014, and a diversified industrial growth company with a combined revenue of $ 6 billion in 2014 to be split by the end of 2016.
If you want to include mergers and acquisitions as part of your growth strategy, you can pressure test your readiness by starting with 4 questions:
1. Do you have a clear and distinctive investment thesis that describes the role of mergers and acquisitions in your growth strategy and defines the types of deals for which you are uniquely positioned to add value?
2. Do you spend a significant amount of time refining your investment thesis and looking for potential deals?
3. Do you have a clear set of principles that define your M&A priorities and best practices for executing them?
4. Do you have an explicit capital allocation framework that can assess the value created through competitive uses of funds?