(Charlotte, NC – April 4, 2017)
Six Principles for Successful Acquisitions —
At North Inlet, we’re always looking to learn from other successful acquirers. In the tech world, Cisco is a well-known serial acquirer and the subject of more than one business school case study. In reflecting on his time at Cisco, Mike Volpi, former Chief Strategy Officer, summarized the company’s success in six key principles. His thoughts ring true more widely than just within the tech sector, and can be quickly summarized as follows:
While there are many good acquisition strategies, attempting to employ them all simultaneously will set you up for failure. Choose one goal and tailor your acquisition targets and process accordingly.
Principle 2: Understand probability.
No matter how ideal the target or your process, the M&A odds are stacked against you. It is therefore imperative to create a strategic portfolio of interconnected targets, anticipating that some will undoubtedly fail while others succeed.
Principle 3: Option value.
Given Principle 2, a small percentage of your acquisitions will yield the majority of your returns. Better to worry less about exact purchase price and more about finding the right target companies, even if it means paying a premium price.
Principle 4: Aligning incentives.
Earn-outs are not the holy grail of aligning incentives and, despite valiant efforts to structure them well, are too easily gamed. Better post-transaction alignment is often achieved through other means, including stock purchases.
Principle 5: Buying market leaders.
Everyone wants to get a “good deal,” but don’t be too quick to settle for second best. An expensive market leader is oftentimes a better value in the long run.
Principle 6: Synergies, synergies, synergies.
Identifying synergies is only the first step and not every company thinks critically enough about how to achieve them. Synergies that drive growth, such as distribution and operational synergies, are better to target than simple cost reduction synergies.
The chart below presents median TEV/EBITDA trading multiples for public companies in four key sectors today and one year ago.
Note: Large cap data includes companies with market capitalization of >$10B; medium cap data includes companies with market capitalization of $2B to $10B.
What We’re Reading
Below are select links to materials and articles that our team found interesting recently (no partnerships expressed or implied).
Corporate Development Strategy: Thriving in Your Business Ecosystem (Deloitte University Press)
In corporate development, traditional dealmaking approaches may no longer be enough to create the desired value and manage potential activism. Companies today need agility, fresh thinking, and a high tolerance for disruption to seize market opportunities in areas where new business models are still being defined…
Surviving M&A (Harvard Business Review)
For individual managers and employees, a merger or acquisition is not just a corporate strategy; it’s a personally disruptive—often traumatic—event. What C-suite executives and consultants euphemistically call “postmerger integration” is typically a period of tension, uncertainty, and even chaos…
2016 Shareholder Letter (Berkshire Hathaway)
Berkshire’s gain in net worth during 2016 was $27.5 billion, which increased the per-share book value of both our Class A and Class B stock by 10.7%. Over the last 52 years (that is, since present management took over), per-share book value has grown from $19 to $172,108, a rate of 19% compounded annually…
Jorge Paulo Lemann, a Brazilian investor, is ill-accustomed to failure. On February 17th Kraft Heinz, backed by Mr. Lemann’s 3G Capital, said it had bid $143bn for Unilever, a maker of food and personal products. 3G has gobbled many a consumer firm, slashed costs, then bought an even bigger one…