At least in theory, it is my belief that many mid-market private companies (say companies with headcount numbers in the 80 to 500 bracket) would make great acquirers. I’ll lay my thesis out in a minute. First, let’s be carful about perceived wisdom. Acquisitions are for the big boys, the IBMs, the Oracles, the Googles. Why? As Malcolm Gladwell pointed out so insightfully in his recent book, David and Goliath, sometimes the underdog should be the favorite.
As Malcolm writes about Goliath and his weapon: ‘To the Israelites, this extraordinary spear, with its heavy shaft plus long and heavy iron blade, when hurled by Goliath’s strong arm, seemed capable of piercing any bronze shield and bronze armor together”. On the other hand, David, “picks up five smooth stones, and puts them in his shoulder bag” (his leather pouched sling was already in the bag). The odds were clearly against the small shepherd boy, David. However the sling in practiced, experienced hands was a devastating weapon, Gladwell writes. The speed with which the stone connected with Goliath’s exposed forehead was analogous to a major pitcher’s fast ball. Goliath didn’t stand a chance!
The small guy can win. Private companies can be successful on the acquisition trail because:
Targets: There are literally millions of private companies that are too small to sell to much bigger brothers. It just doesn’t move the dial for these really larger groups. Now that is not the case for a middle market private company, that is on the acquisition trail. That particular acquirer is often building a platform of related businesses, creating mass by stealth, quietly building market share to be saleable at a premium one day. Those acquirers love a small business that could fill a product or channel need.
Strategy: They have a coherent strategy signed off by the board and understand exactly what they want to buy.
Post-acquisition integration: They understand why the target really fits into their small group, and therefore the potential post-acquisition strategy. Acquisitions are for operators.
Empathy: Management demonstrate empathy with owners because they are owners. Their operational skills can’t help shining through in early meetings. Owners love credible operators.
Nimble: They are constantly recalibrating their integration strategy as the facts are uncovered (or the deal is dead).
Operational Knowledge: They know how to investigate targets, where the bodies are buried and where the potential lies.
Story Telling: They are naturally very proud of their business, are ambitious, and selling the dream comes easy. When you’re buying so many acquirers forget they are selling.
Talent: They get the importance of staff engagement. Acquiring talent is a key part of the deal and they need people to stay.
Money: Capital has never been cheaper and whilst it is never easy raising capital, an acquisition presents a clear ROI to funders.
These are the inherent genes in place with a private company. However like any great athlete those skills need honed and developed with a great process, playbook and collaboration platform. Owners of private companies are missing a very attractive opportunity to scale their businesses using small, bolt-on acquisitions. These deals can quantum leap growth leading to a safer more profitable business.
The Portfolio Partnership – Buy-side investment banking re-imagined. The Portfolio Partnership continues to offer practical operational support to leaders who wish to scale their businesses both organically and by acquisition. Ian@TPPBoston.com or call 978 395 1155.
Further reading: How to tell if your small company needs to expand through acquisition – Link.