We were intrigued by an article in this month’s Harvard Business Review by Roger L. Martin on the importance of mutual benefit within M&A transactions. Mr Martin suggests that buyers who provide something to the target company that will make the target more competitive will reap the rewards. By contrast, if the acquirer is unable or unwilling to improve the competitiveness of the target, then the transaction is likely to erode value. He believes an acquirer can improve its target’s competitiveness in four ways:
1. By being a smarter provider of growth capital. This can take many forms, and includes facilitating the roll-up of a fragmented industry in the pursuit of scale economies or accumulating market power;
2. By providing better managerial oversight, including strategic direction, organisation, and process disciplines, particularly when they support the scalability of the target business;
3. By transferring valuable skills, assets or capabilities. This skill should be critical to competitive advantage; or
4. By sharing valuable capabilities, which is similar to the previous point but involves sharing capabilities or assets rather than transferring them.
This article succinctly articulated the analysis that InterFinancial works through with clients when preparing for and executing a strategic transaction (whether a sale or capital raising process). These transactions attract a strategic premium for the target company, because both the target and the purchaser clearly understand the improved performance that is projected as a result of the improved competitiveness – and therefore forecast performance – that is supported as a result of the transaction.
We have worked through the strategic opportunities with our clients in order to support a premium price on transaction and were prompted by this article to explore whether the “value” that we had identified in advance was realised by clients and if so, did it relate to improving the target company’s competitiveness in the market.
One of our clients confirmed that the business was rapidly growing market share and he was “so excited that he didn’t want to take the weekends off” since the sale of a majority stake in his business to an international industry participant. In this case, the acquirer is providing “smart capital” to strategically grow the business, and providing “broader management support and practices” on a global level that could not have been supported in the domestic business. The international relationships, experience and operations of the investor are strengthening the competitive advantage of the business in the Australian market and driving value growth for both parties.
Another client confirmed that the introduction of a strategic investor has accelerated the global expansion and sectoral diversification as our client has been able to access and leverage the investor’s global distribution channels – a “key asset they share” with our client that enhances our client’s ability to compete in the global market.
Although the article is new, the practices are core to securing strategic value in a transaction. It reinforces our focus on thorough preparation and strategic research on the potential targets. This is critical to ensuring that we can clearly articulate how the acquisition by the particular investor will improve the competitive position of our client’s business as well as their own – and therefore support a superior valuation.
If you are considering a strategic sale, capital raising or an acquisition, we would be delighted to explore these concepts further with you. We also encourage you to read the full article which can be found at the following link: