Stax

a global strategy consulting firm

Fast Frameworks Series

Einstein, Acquisition Screens, and You By Rafi Musher, CEO March 2013
Whether you regard time as a steady continuum or stretchable elastic, as Einstein theorized, it is still money. We often see organizations spend a lot of money without saving a lot of time, when they could have spent the same money, saved a lot of effort, and reached their growth goals more quickly. When it comes to creating equity value, growing a business faster in less time is generally worth more money than the reverse. If youre a private-equity owner or a private-equity-backed CEO, with a five-to-seven-year holding period but unable to get the growth you want fast enough, you dont need Newton to tell you that your returns and personal equity value will never make it out of gravitys grip. Acquisition is a standard engine used to drive growth. Common strategies include acquiring for regional expansion, product extension, increased distribution, synergies, and straight-up price arbitragethat is, buying a smaller company at a discount and rolling it into an entity carrying a higher multiple. In addition, a strategy thats become increasingly popular recently is making an acquisition to bring an important technology into an organization, even for industries that seemingly have no tech connection whatsoever. Acquisitions certainly arent always successful, but there are ways to improve the odds.

About the Author

THE ADVANTAGE OF EARLY ANALYSIS

At Stax, we routinely get calls from clients looking for last-minute due diligence relating to bolton acquisitions. Theyre looking to understand a target acquisitions market positioning, its competition, long-term customer needs and impressionsall to build a fact base as to whether this is a good investment or a bad one and whether it will work strategicallyall in three-to-four weeks. We dont mind these calls; this is one of our specialties. We cant help thinking, though, that these clients would have been better off starting the process by building the fact base about which targets are the best, before diving into a specific due diligence. One of Einsteins many famous quotes is, If I had one hour to save the world, I would spend 55 minutes defining the problem and only five minutes finding the solution. Not that M&A is saving the world, but shouldnt there have been more upfront analysis for something thats a potential strategic investment? Shouldnt everyone have had the deal on the radar screen and with enough context to make this an even-paced diligence? Why not change the behavior, getting more input early on which companies would likely make the best candidates, so your efforts can be more targeted andwhen that opportunistic deal does arrive--it can be put into context with other potential candidates. Knowledge is power. The reluctance to invest in outside resources early seems to stem from several old-school problems. First, the legacy consulting industry has conditioned clients to think of consulting as a high-priced resource to be used sparingly, causing clients to think in terms of a high cost per week or cost per deal and making everyone afraid to get smart early. Second, from a financial perspective, the budgeting mechanism for expensing deal fees allows management to expense the cost of deal-related due diligence and many organizations do not have the planning projects built into budgeting. In addition, theres the psychology of never spending until a negative option is right in front of you (such as potentially getting a deal wrong). Finally, organizations that have a business development team may think that the BD team should be doing all of

Founder and CEO of Stax Inc., and Stax Dev Corp., based in Staxs New York office. For the past 20 years, Rafi has been leading corporate management consulting engagements and working with investment firm leadership teams to identify profit opportunities and mitigate risks across industries. In 1996, two years after founding Stax, he launched the firms private equity and M&A due diligence practice and in 2011 he founded Staxs Dev Corp. to develop new deal situations in partnership with Stax clients.

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Stax

a global strategy consulting firm

Fast Frameworks Series

Einstein, Acquisition Screens, and You (cont.)

the screening. In reality, for most companies an acquisition screen should be a once every year or two project that requires a lot of resources focused on it over a short period while the process of pulling in and closing deals should be an ongoing prospecting, relationship-building, resource-management (outside and inside), and deal-closing set of activities. Most organizations would save significant time and money over the long run by doing an intensive screening up front over four-to-eight weeks, and then doing light updates over time. Because potential acquisition candidates will have already been largely vetted for critical criteria before the formal acquisition process begins, all of your resources are better directed from the outset and you have a much better chance of hitting your targetsessentially accelerating growth. Youd also have more information about each company, avoid time with lesser candidates and ask better questions of the good ones, and overall spend less on the due diligence associated with each deal.

HITTING THE KEY STEPS

Staxs fast framework for acquisition screening blends strategic thinking, a defined research approach, and execution with common sense to produce actionable results that are data driven. The process includes the steps companies need to make informed decisions. 1. Get all of the key stakeholders on the same page. What are the governing hypotheses and what could be the ways to gois it to expand geographically, in products, in distribution channels, in customer bases, into new technologies, into faster growth areas, or similar criteria? Find out what your team leads think so that you can later compare their hypotheses with market validation and actionable opportunities to acquire assets. 2. Define how much information is necessary for the screen. Weigh how much you need to make actionable decisions along with what time frame is practical to gather and digest the information. Whats the best tradeoff between the two? 3. Build the fact base. Go into the marketplace and intensively dig to gather all the critical information. Not only do you need to Classic Mistake: Just because understand potential markets and players, but its critical to talk to customersto a target sells to the same understand what they want and what they companies you do doesnt think of potential targets. Stax emphasizes mean its dealing with the same this rolling-up-your-sleeves approach because buyers within the organizations. it provides the best, and most actionable information. 4. Identify where the real sources of value reside. What part of the target company does the customer truly value? Is it the product, the channel, the technology, the sales people? Are customers locked in because it is too expensive to switch providers? And ID risks: Do customers typically want the security of having at least two providers, so buying the nearest competitor will wind up cannibalizing your current revenues? 5. Map the data. Lay it all out in a way that highlights the value potential from the customer perspective, and compare that with a potential equity valuation perspective. Many a merger has destroyed value, because what looked like a synergy on a spreadsheet was a disaster for the sales force. Similarly, make sure within this process to give your team the time to propose the cost and time to build organically versus acquire, which will further vet the candidates and identify where you might be considering an acquisition primarily to buy

Staxs FastFramework Series

The acquisition-screening framework is part of Staxs fast-framework family of services that are highly intuitive, are highly actionable across the organization, can be delivered in twoto-three months, and then implemented in a similar timeframe to deliver returns almost immediately. Our success across PE firms, their portfolio companies, and corporate clients has helped businesses win share, accelerate growth, expand overall margins and equity value. Staxs experience has shown that a little bit of practical, actionable work deployed in a fast framework format can really help a management team succeed. Thats good business all around.

Stax Inc. All Rights Reserved.

Stax

a global strategy consulting firm

Fast Frameworks Series

Einstein, Acquisition Screens, and You (cont.)

your way out of a problem. It may prove to be a great strategy; you just want to make sure the comparison is transparent. 6. Debate with data, to draw the best conclusions. Now that you have the information, discuss and debate the strategies, in order to prioritize the best plan forward. The debate and discussion is invaluable to get the ideas out, vet any challenges with the team, and build consensus. 7. Meet the candidates. Now that youre prepared with who you want to acquire and have a sense of strategic value, its time to get out there armed with a full knowledge base to talk with the people youd like to work with.

THE LONG-TERM ADVANTAGE

Acquisition strategies are rarely short term, and they use a lot of capital. The wealth of knowledge that an acquisition screen provides allows you and your team to better choose who you want and why. In the best scenarios, you call someone early with a better story and they realize that working with you will be an easy process, because you are well informed. Worst case, they put you on the list for when the auction comes around, and you have an information advantage over other potential bidders. Seeing smart clients wait until they have a Letter of Intent to get a crash course on the customer interest in the target brings up another Einstein lesson: Insanity is doing the same thing over and over again and expecting a different result. Stop the insanity, accelerate your growth while lowering your total effort. You may not be able to bend time, but you can certainly use the time you have more effectively. Einstein would undoubtedly still consider that a smart thing to do.

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About Stax Inc.

Stax is a global strategy consulting firm providing clients with actionable answers based on deep research and analysis. Founded in 1994, Stax works with clients ranging from the Fortune 500 and 14 of the top global LBO firms, to middle market private equity firms and their portfolio companies. Projects include business and market strategy, customer analyses, marketing analytics, and commercial due diligence, with targeted engagements around revenue generation, ROI maximization, and M&A. For more information, visit www.stax.com.

About Stax Dev Corp.

The Stax Development Corporation creates new companies and joint ventures to develop innovative solutions to address critical market issues. It draws on Staxs extensive research and industry knowledge to identify market white spaces, key opportunities that others have missed or havent addressed adequately. It then draws on relationships with more than 100 global private equity funds and a long list of global corporate clients to build and incubate new ventures to fill these gaps.

For further questions regarding the research and findings, please contact: Rafi Musher, CEO 600 3rd Avenue, 12th Floor New York, NY 10016

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