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Think Small to Win Big

by on March 14, 2014

Think Small First time deals can be intimidating.  There are a lot of new issues to deal with.  As the CEO you want to know that your team can handle the workload given that they’re already very busy.  You want to know that you’re getting all the information you need in your due diligence.  You want to know you’re not paying too much. You want to know that you can integrate the acquired company effectively.

Start Small

The best way to start with M&A is to start small, relative to the size of the acquiring company.   There is about the same amount of work doing a big deal as compared to a smaller deal and therefore the standard argument is to make the effort worthwhile by making it a big deal.  That’s the typical view of bankers and investors.  That’s the “home run” mentality. I think it’s better to do smaller deals, more of a “hitting for singles” mentality.  You can string together a series of smaller deals and melding them together to create a unit whose growth potential is bigger than the sum of its parts. This is the “string of pearls” approach.

Benefits of Small Deals

You may expect that the benefits of a bigger deal will create more value for the acquirer because there are opportunities for more synergies, studies show that is not the case.  While the amount of work may be the same, a bigger deal has greater risk of value destruction which tends to offset the potential greater synergies of a bigger deal.

Fumbling the M&A Process

Most companies, when entering into M&A for the first time, fumble with the process, lack focus, make unclear decisions, and identify potential targets in a purely reactive way, jeopardizing the growth they’re looking for and the very reason they’re considering M&A.

Specific Skill Set

The reason most companies struggle with their first M&A deal because it requires different set of skills than simply doing your job. It requires a different perspective.  Studies reveal time and time again that the greatest predictor of success in M&A is experience. Work with someone who has the skill set and the experience.   The best deals are done using the best M&A teams.   The best CEOs know that it is better to learn from the mistakes of others than to learn from their own.

First Deal

When I was running corporate development for Lumension our first deal was an acquisition of STAT, a division of Harris Corporation.  The company had done one deal prior to my arrival and it wasn’t considered a good deal.  It wasn’t a good deal because the team that did the deal did it poorly.  The new CEO knew he needed the right skillset to make M&A functional growth strategy. The STAT transaction was a small one for Lumension and it allowed the new management team to learn to work together while keeping the risks of doing a bad deal to a minimum.  It sent a message to everyone in the company that we were serious about growing through acquisitions, and it started to change the culture of the company. Lumension went on to do several more deals and is now a global endpoint security company and a major player in the industry.

p.s.

If you’re wondering how you build a company that you can sell for a premium in a few years, contact me to discuss the Valuation Amplification Process.

I also invite you to download the white paper and learn How to Quickly Increase Your Valuation – A Proven 5 Step Process.  http://www.therevenuegroup.net/free-offer.html

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From → Integration, M&A, Strategy

3 Comments
  1. Ellie Hendershot permalink

    Mike, A nice, easy to understand statement of how to begin the acquisition process—with you!

  2. 2020outlook permalink

    Mike,

    Nice post.

    I agree with the idea about smaller deals are more likely to succeed. The size of their impact has to do with how far along the continuum from asset deals to strategic deals they are, with respect to your business. A very small company that has an offering that’s an exact fit that you can quickly integrate and push out to your existing significantly sized base can have a huge impact!

    Of course, who am I to preach to the choir?

    Happy Ides! Bob

    *Bob Barker* Trusted CEO Advisor

    *+1 512 695 0902* *bob@2020outlook.com* *website blog LinkedIn twitter * *A problem well-stated is a problem half-solved. * * -Charles F. Kettering*

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