By Jim Tompkins, CEO, Tompkins Associates
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Welcome to our 8th series on our Global Supply Chain podcast. Hi, this is Jim Tompkins, President and CEO of Tompkins Associates and Tompkins International.
I am very pleased to be with you again today to talk about one of the most important subjects impacting many supply chain executives today.
This is the topic of mergers and acquisitions. This six part series began two weeks ago with an overview presentation by me, and today we move forward with Steve Ganster, who is the CEO of our China-based company, Technomic Asia.
Today Steve is going to help us understand more about strategy and the potential of M&A targets.
Steve, welcome. You know Steve, as I think about this, many companies have done mergers and acquisitions that really have not worked. Often times the deals fall through, or worse yet, the deals go through, and they fail to meet expectations.
As in most things in life getting the process off on the right foot is the key to success. How does this play out when pursuing acquisitions?
Steve:
Good points, Jim. You’re absolutely right about starting the acquisition process on a solid footing. It all starts with the acquisition strategy. The purpose of any acquisition is to help the acquiring company perform better and/or faster in growing their revenue and profit. So a good acquisition plan must be rooted in, as well as aligned with, the company’s overall strategy for growth.
Sounds simple, but you and I both know that acquisitions often evolve independently and even contrary to the company’s strategic plan. An expression we often use in China as a result of the “rush” to get into the market over the last 15 years, is make sure you observe “strategy before structure”. The reality was often the opposite. This saying equally applies when making acquisitions. Many acquisition deals are opportunistic in nature and can simply fall into our laps.
But we have to ask, are they truly in line with our strategy? Management can easily get distracted by the prospect of acquiring an attractive looking company with all sorts of upside potential, but fail to test the logic and fit of the deal against their strategy.
I am not saying we shouldn’t be responsive to these types of opportunities, but we must have the discipline to make sure they are consistent with our strategic game-plan. We often encounter in our consulting work that when management steps back and asks the question on the strategic viability of the deal, a different but equally attractive alternative can emerge . . . one that is better aligned with their strategy.
One of our clients in the heavy truck industry was approached by a distant competitor to establish a joint venture in order to enter into a new market. Our client had the wherewithal to first explore if the business case was valid, and then considered how well the company stacked up as a way implement it. In the end, the business case was good but the target was not the best way. Our client ended up pursuing the opportunity organically instead of partnering with anybody at all.
Jim:
What are some ways that management can ensure that they maintain this disciplined approach?
Steve:
Acquisition opportunities can come to us in a variety of ways. Let me segment these into two broad categories of opportunistic and proactive. First, opportunistic deals are basically unsolicited and come to us via investment bankers, brokers, and other intermediaries. Even the target company itself may make a direct approach. We find that these types of opportunities can be the most challenging in terms of strategic alignment, because they evolve outside of our growth planning process. Let me use a personal analogy here that I hope is useful.
My wife and I have been conducting some significant remodeling of our home, and we hired a designer to help construct the overall flow, style, color scheme, and the like. While in the middle of this process, we came across this beautiful Persian rug, which my wife and I just loved (since living in Singapore, we have developed a real penchant for middle eastern carpets). Furthermore we could this carpet at a ridiculously low price. But before we did something rash, we had the presence of mind to run the idea by our designer.
She quickly shot it down because, despite it being a fantastic rug at a cheap price, it did not fit our overall decorating scheme, and would have undermined the look we were trying to achieve. It’s easy and oh so frequent for senior management to experience this same temptation when it comes to unsolicited acquisitions. They may look good on a discrete basis but are a poor fit to what they are trying to do as a firm.
Jim:
Steve, that makes a lot of sense and I can relate personally to what you are saying in that I have been involved in over 50 M&A transactions, some for private equity firms and others by companies for strategic reasons, and I really agree with what you are saying. How can this really be done more from a proactive side?
Steve:
Proactive acquisitions tend to be the more strategically aligned, as management is looking for very specific company attributes to contribute a piece of the puzzle in their overall growth plan. An effective, proactive process rests on a set of very well defined acquisition criteria which have developed as a direct outgrowth of our strategic planning process. These criteria comprise both internal and external parameters. Internal factors include: size of deal, relevant industry or target technology space, cultural fit, geographic location, the company’s available capital (both for the deal and afterwards by the way), etc.
External parameters deal with industry issues like market attractiveness and risks, growth outlook, regulatory trends; and also include target company attributes such as market share, or the strength of their customer base and image, supply chain structure, manufacturing capacity, sales channels and reach, the competence of the management team, and other factors. An effective methodology in the screening process is to segment both the external and internal criteria that were just mentioned into two levels. The first is at a more macro level and deals with factors that are more easily researched. Putting candidates through this initial filter enables a first cut of the long list of targets and narrows the field to a more manageable short-list of candidates on whom you want to focus your resources. These targets are then evaluated in light of a more complex set of criteria, or even a deeper look at criteria used in the first screen.
This second set of criteria deals with the harder to get information requiring more investment of resources and more intimate contact with the target firm. We want to implement this effort only after we have narrowed the field substantially or costs can get out of hand. We have even seen three levels of criteria in some cases, where the universe of candidates is very broad, often the case when using acquisition as a vehicle to diversify well outside your current industry space.
Jim:
What tends to trip companies up as they go through this phase in the acquisition process?
Steve:
A number of things can go wrong here, Jim. First, you don’t take the time and spend the money to do your homework on the market and the target companies. This investment is especially important when you are drifting outside of your company’s comfort zone in terms of industry, technology or geographic area. Second, bias can creep in depending on who will be responsible for operating the newly acquired company, or among management who will be adversely affected by the deal. The use of third parties in these initial phases of acquisition strategy and candidate qualification can minimize the bias factor, as well as contributing industry, geographic and technology experience and connections. But this third party can’t have a vested interest in the deal or a different type of bias will emerge. And remember, we need to be continually sanity checking the acquisition targets against our growth strategy at frequent intervals during the screening and target cultivation process.
Jim:
How do these dynamics differ when doing a deal internationally?
Steve:
Simply stated, they can become much more complex for a number of reasons. First, there is typically geographic distance that has to be dealt with. You need to have the right resources on the ground in the target country where you are looking. This can be expensive and time consuming, especially to shuttle management back and forth. A frequent compromise is to not make the trips, which can be disastrous to the deal. Obviously different cultures will come into play, so the need to modify your process to the local environment is important. This especially plays out in the relationship side of the candidate cultivation process. Compared to the U.S., most cultures are more relationship oriented and face time is very important to the relationship building process. The need to travel to get this face time exacerbates the challenge and cannot be short shrifted. Many other issues also exist such as the role of government, local legal requirements and restrictions, tax complexity, intellectual property protection, grey business practices and many others. In general, Jim, the overall acquisition process is the same but certain phases in it require adjustment or more attention to make them geographically relevant.
Jim:
Thanks, Steve for your insights on the front end of the acquisition process. Any final thoughts you would like to share?
Steve:
Yes, one other point Jim, and that is to be thinking about the end game from the outset. By this I am referring to integration planning. How the acquisition will fit into the company organization and strategy and who will manage it have to be well thought out from the get-go. Also, the acquisition team should include those folks who will come into play at the end of the acquisition process. One of our clients, who has done over 100 acquisitions in the last 20 years, has a rigorous and very effective integration planning approach that kicks in at the beginning of the process.
The success rate of their acquisition history is one of the best I have seen. As we have seen at Tompkins many times, the head of supply chain often hears about the deal an hour or two before it goes public! Obviously that is not a best practice. I know Gene Tyndall will have some important things to say on this topic later in the podcast series.
Jim:
Thank you Steve and thank you to all who have attended today’s presentation. I am excited about Part three in two weeks when Valerie Bonebrake will be joining us. Valerie will be sharing with us due dilligence with a strong emphasis on what interests us most in this podcast, supply chain due dilligence.
I look forward to speaking with you real soon.
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