M&A Without Buying the Company
Most people tend to look at acquisitions from a rather myopic and traditional M&A perspective: making a strategic or synergistic purchase of an operating entity on an accretive basis. However restricting your view of acquisitions to operating companies is like playing a football game with only one play in your playbook. The truth is that acquisitions aren’t just about buying companies, they’re about value creation. In the text that follows I’ll share 8 ways to acquire value without having to also buy the brain damage that comes along with purchasing the entire enterprise.
Understand the Play
With the right perspective, combined with knowing where to look, acquisitions can be extremely profitable while not being all that complicated. There’s an old saying that “one man’s garbage is another man’s treasure” and nowhere is this more applicable than in the world of acquisitions. Here’s the thing – the best acquisitions are made when the buyer sees value where the seller doesn’t. If your value-added acquisition targets can be found in things the seller has little interest in, there is a spectacular acquisition in the making. Want to see a transaction come together quickly? Allow someone to monetize on something they either view as an asset of little value, or better yet, something they view as a liability.
Acquiring Value Not Companies
I want you to think about acquisitions from this perspective – anything that has been well engineered or properly developed has also been heavily invested in. This often creates both tangible & intangible worth, even if someone else doesn’t currently recognize it or benefit from it. The simple truth is that it’s often much easier to acquire an asset than create one from scratch. This can occur because you’re leveraging the investments of time, money and efforts made by someone else who now doesn’t value them in the same fashion they once did. By stripping the target out as a stand alone asset you acquire the leverage of sunk investments which will often include significant good will, mindshare, marketshare and any number of other benefits in a much less complicated transaction.
While the text above discusses acquisition from the buy-side perspective, the logic should not be lost upon potential sell-side players. Those companies that have developed assets that they no longer value, or companies who are maintain unwanted liabilities should look into a valuation and consider a possible divestiture of said assets and liabilities that don’t fit into the company’s operating strategy going forward (where it makes economic sense to do so).
The following list contains eight representative examples of acquisitions that can be made without having to purchase the entire enterprise:
- Talent: It is not at all uncommon for a company to undervalue, under compensate, or otherwise take its people for granted. An “at risk” employee for the current employer is an opportunity for the prospective employer. Even when a company highly values its talent there is no assurance that said talent feels the same way about its employer. The right talent acquisition can have a rather substantial and immediate impact on things like revenue, culture, positioning, brand, etc. Smart employers are always on the lookout for great talent. They also go to great lengths to guard against the unnecessary loss of their own talent. There is also a great opportunity for adding talent leverage via outsourcing, crowdsourcing, and other contract opportunities that provide cost savings and scale.
- Intellectual Property: Whether it be formal IP such as patents, trademarks, copyrights, etc., or informal efforts produced via someone else’s R&D or innovation efforts, companies often start projects that they don’t finish. This can create an opportunity for the astute buyer. I have personally witnessed companies who have hundreds of pieces of intellectual property just sitting around collecting dust. I have also observed numerous transactions over the years that have been good for both buyer and seller. This occurred in instances where the seller was able to monetize on theoretical value, and the buyer was able to convert the acquired IP into real value.
- Cash Flow: Many companies are in need of generating cash and simply cannot afford to wait for payments over time, and are therefore willing to sell contracts, notes, deeds, loans, leases, etc. In today’s market you can buy anything from a single note to an entire portfolio of debt (both performing and non-performing) at deep discounts. While this is not a market that everyone should dive into, there is substantial opportunity for exceptional returns for the right buyer.
- Markets: Whether you purchase distribution, licensing, or other contractual rights, you can enter into market segments, verticals, or geographies via intelligent acquisitions. Often times these acquisitions can provide you some form of exclusivity or other form of competitive advantage.
- Customers: Some of the most interesting acquisitions I’ve been a part of have resulted in the purchase of customer contracts. A contract is a commodity that has both tangible and intangible value (for the right buyer). Contracts can often times be purchased, assigned or otherwise transferred. All companies have contracts they don’t value at the level they once did. Many companies face changes in circumstances that make it difficult for them to continue to fulfill on their contractual obligations. Other companies are in need of cash and are willing to sell certain contracts as a financing vehicle. In other circumstances, you’ll find business that you can fulfill better, faster, and more cost effectively than the current provider creating an opportunity for arbitrage or even subcontracting.
- Equipment: An unwanted piece of equipment owned by someone else can result in allowing you to enter a new market, increase your production capacity, or provide you the ability to win business from a potential customer whom you could not previously serve. Whether you purchase equipment directly from the owner, via auction, from a bank, receiver, trustee or other custodian, you can add significant value to your business through the intelligent purchase of equipment.
- Brands: Real brands have real value…in fact recent studies confirm what many of us have known for quite some time, which is that brand equity can become one of the largest assets on a companies balance sheet and ultimately lead to increased valuations. That said, many companies have made substantial investments into brands that no longer fit into their operating strategy, or that for other reasons they no longer value to the extent they once did. It’s much easier to enter a market, or expand marketshare by acquiring a brand than creating one from scratch. Just because the current brand owner doesn’t value their brand equity, doesn’t mean that you shouldn’t.
- Real Estate: While there are certainly exceptions to every rule, we are in the midst of the worst global real estate market in recent history. Valuations are down worldwide, so if you’re looking to expand manufacturing or distribution facilities now is the right time to acquire real estate. If you want to expand sales operations, but don’t want to acquire a building, fantastic sub-lease opportunities are available in virtually every market at deep discounts. Many companies are upside-down in their real estate holdings and are looking for someone to stop the bleeding for them. Likewise, the special assets and real estate owned groups within banks and financial institutions have a dearth of property that they are trying to liquidate. It is not uncommon to be able to purchase a property for less than the face value of the current debt owed.
Bottom line - you don’t have to buy an entire operating entity to incorporate an acquistions plan into your overarching business strategy. While the value of a component may not be as great as the overall value of the entity, this doesn’t mean that a component still doesn’t have significant value.