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Acquiring Your Way to Growth

03/06/2016


Canada’s economy continues to putter forward in low gear, weighed down by low commodity prices, an oil sector downturn that shows little sign of changing and slower growth of exports of goods and services. In an environment like this, many companies wonder whether it’s even possible to achieve meaningful growth.

Yet enterprising Canadian companies are finding ways to strengthen and grow their businesses. Pursuing acquisitions is one strategy that can enable companies to achieve growth well beyond what they can achieve organically in a low-growth environment — as long as the deals are strategically aligned, well planned and effectively executed.

Merger and acquisition activity is expected to rise across Canada over the next several years. Business leaders and owners searching for growth should take steps now to consider whether acquisitions make strategic sense for their company, and ensure they’re ready to execute the deal flawlessly to realize the maximum benefit.

The imminent rise in Canadian Mergers and Acquisitions (M&A)

Over the next decade, a wave of mergers and acquisitions will sweep across the Canadian business landscape. One reason for this is the fact that Canada’s small and mid-sized oil and gas firms will soon start to consolidate, joining forces to create new companies strong enough to withstand today’s turmoil and emerge strong, lean and ready to compete in a changed industry. It will be a painful process, but also a necessary one — as Canada’s automotive suppliers can attest. A similar period of consolidation in that sector eliminated excess capacity and created a smaller, more productive and more competitive industry: companies emerged from the 2008-2009 recession with stronger balance sheets and lower breakeven points than they’d had for over a decade.

Another factor set to drive increased acquisition activity is the fact that a large number of Canada’s business owners are expected to retire over the next ten to fifteen years. While many owners undoubtedly intend — or hope — to transition their businesses to a new generation within the family, others will choose instead to sell their business.

For companies keen to drive growth through acquisition, these developments suggest that they will have an abundance of potential targets in the years to come.

Successful acquisitions require a clear strategy

No company should pursue — much less complete — an acquisition just because the opportunity presents itself. Company leadership should determine what kinds of deals make sense given the company’s resources, ambition, vision and business strategy and identify and agree to clear objectives for any acquisition program

Some companies may be smaller and have modest resources available to them. Others may be reluctant to move too far beyond their comfort zone and prefer to avoid risk. These companies may often choose to buy margin, focusing on tuck-under transactions which can readily integrate into their existing business.

Larger companies, those with more resources or those willing to take on greater risk to achieve their ambitions can more easily entertain bigger transactions. Deals may be pursued to expand into new markets or a new line of business or perhaps gain access to new technologies, processes or talent.

All companies, however, need to stay vigilant that they don’t pursue deals in order to mask poor business fundamentals. Acquisitions done to add revenue or boost the balance sheet are often completed with little regard for strategic alignment or proper integration. Such deals don’t fix the problems at the root of the business — they only exacerbate them.

Identifying the right targets

Once a company determines the strategic rationale for an acquisition program, the next step is to identify suitable targets. Companies should develop a list of key criteria they can use to evaluate and rank potential acquisition targets. A vast range of attributes can be used as acquisition criteria:

  • Current and forecasted growth rates
  • Product, service or market alignment
  • Geographic presence
  • Proprietary products, services or processes
  • Market segment diversification
  • Ease of integration
  • Management capabilities

Financial elements are also typically taken into account in evaluating potential acquisition targets — from the size and structure of the transaction to the form of consideration used (i.e., cash, debt, shares or some combination) and the pre- and post-deal financial ratios.

In many cases, companies pursue acquisitions that are relatively close to home, or within the acquirer’s region. Sometimes, however, companies find themselves considering more distant transactions. Moving into a new market can be an attractive route to growth — but acquiring companies should ensure that it’s worth it. Managing at a distance can be challenging, and distant acquisitions can stretch supply chains and organizational structures alike.

Execution: Need help? Get help

Acquisitions can be lengthy, complex processes. The right deal done well can quickly make a positive impact on the acquirer’s business. The right deal done poorly can take longer to deliver value — or fail to deliver value at all.

Companies should determine whether they have the internal resources to evaluate targets and execute the acquisition itself. Engaging external advisors with extensive transaction experience can be a cost-effective way for businesses to access much-needed professional resources without the long-term cost of hiring.

Advisors’ expertise can also significantly improve the odds of a successful deal. They bring impartiality and objectivity to both the evaluation and due diligence processes, helping management make the right decisions. As well, by outsourcing much of the work to an outside advisor, the management team can stay focused on keeping their business moving along well.

Post-deal integration

Once the acquisition transaction is concluded, the real work begins. Companies need to invest their time and energy to ensure that the acquired business is effectively integrated in order to realize the deal’s intended value. Post-merger integration (PMI) is an absolutely vital and all-too-often neglected part of any acquisition. The majority of transactions undertaken fail to deliver the expected value and PMI usually lies at the heart of the problem.

Companies need to ensure they plan for integration of the target company long before the deal closes. Management needs to identify the targets to be achieved and set out the strategies for doing so, communicate the plan to all involved and assign clear accountability for achieving results. A formal process of regular monitoring and reporting can help management and the integration team measure progress against targets and quickly intervene to stay on track.

Achieving growth through acquisition:

A viable strategy for tough times

Your business doesn’t have to be held back by a low-growth economy. Acquisitions can provide your company with a way to achieve superior growth — but not any deal will do. Making sure acquisitions make strategic sense and carefully evaluating your targets can give you the confidence that you’re pursuing the right deals for your business. And executing those deals efficiently and tackling integration with rigor and discipline can ensure they deliver the value you desire.

If you’d like to discuss how your company can achieve its growth ambitions in a low-growth world, please contact Stephen Shaw, CPA, CA, Senior Vice President & Director, Corporate Finance at 416.515.3883 or [email protected]