(Charlotte, NC – August 29, 2017)
Valuation is Secondary to Fit –
Long-term value creation in the best strategic acquisitions – opportunities that can be hard to find –is not typically driven by small savings in initial purchase price. Don’t miss the opportunity while trying to negotiate a slightly better deal. According to Michael Volpi, former Chief Strategy Officer at Cisco Systems, “Worry less about what you pay and worry more about what the market is saying about the products and the company’s fit with your organization.”1 Of course, no company should make consistent overpayment an acquisition strategy, but do keep in mind the guidelines below when determining how aggressively to value an acquisition target:
Know Your Investment Thesis: The right time to pay a premium price is when the target aligns exceptionally well with your overall strategy. This means you must be able to clearly articulate and have management buy-in on your investment thesis. Jeff Drazan, Managing Partner of Bertram Capital, put it this way, “We know when to stretch and when not to stretch from a valuation perspective. It all comes down to the investment thesis on value creation. We know with high confidence what we can and cannot do.”2
Be Bold: Portfolio masters are willing to pay robust multiples for the right deals because they have more experience in assessing potential synergies and integration costs, as well as knowing how the new business and legacy businesses will create value when combined.3 If you have confidence in your investment thesis and have done the proper due diligence, do not be afraid to pay a full valuation in order to secure the desired target.
But Don’t Shop When You’re Hungry: In other words, be willing to pay up for the right deal, but use measured, strategic thinking when determining the value drivers of that target. When a management team has what is perceived as an urgent strategic need and gets mentally locked into a particular path without considering other viable alternatives, the risk of overpayment is high. Avoid “deal fever” that can result in hasty decisions.”4
Remember the Big Picture: Many acquirers make the mistake of losing the forest for the trees, ultimately walking away from a good strategic acquisition over a small valuation issue. Determine your threshold relative to the total deal value and be willing to give on some issues, particularly when doing so may preserve relationships key to integration success. Ultimately, an acquirer is purchasing option value. Ensure that finding the “best fit” comes before finding the “best deal.”