Build Your Own

Acquisition Factory
An unconventional way to sustainable growth and market leadership
A
lthough mergers and acquisitions are an attractive option for
growing profit and expanding a business, the risks involved
may cause some companies to avoid realizing their full potential.
An acquisition factory is an excellent complement to organic growth
and a large-scale mergers and acquisitions approach, as the focus is on
acquiring smaller, more manageable companies in a similar or related
field. It also involves a more systematic and efficient approach in
researching potential targets, managing a series of transactions and
mitigating integration risks.

Companies never stop searching for sources
of profitable growth, whether organic or external.
Under ideal conditions for organic growth,
companies zero in on growing markets and mar-
shal their internal resources wisely. When markets
are saturated or management capacity is stretched
too thin, organic growth falters and external
growth through mergers and acquisitions (M&A)
becomes more attractive.
However, both mergers and acquisitions are
riskier than organic growth. M&A research over
decades has long shown that only around half of
all deals actually create value. The other half
destroys it. A recent A.T. Kearney study identified
an average value loss of 2.5 percent, measured by
the decrease in market capitalization against
industry peers over a three-year period before and
1
All Mergers Are Not Alike: Seven Merger Types and Approaches to Master the Integration, A.T. Kearney, and To Get Value from a Merger, Grow Sales,
Harvard Business Review, by Jrgen Rothenbcher, Jrg Schrottke, Sandra Niewiem and Gregor Wiche, May 2008.
after the deal.1 Prominent M&A failures, such as
Daimler and Chrysler, Adidas and Salomon
Sports, Siemens and Nixdorf, and TimeWarner
and AOL, underscore the challenges. Typically,
the larger the deal, the tougher the challenges
the larger the parties, the higher the organizational
complexity and the stronger the corporate culture
of each party. Money and executive attention are
diverted toward managing a big deal, integrating
a complex organization and capturing synergies,
and away from markets and customers, thus ham-
pering profitable growth.
There is another route to sustainable growth
and market leadership. Acquirers can acceler-
ate growth by using a serial, standardized acquisi-
tion and integration strategy that we call the
acquisition factory. Our research shows that an

A.T. Kearney | build your own acquisition factory 1

 acquisition factory provides many benefitsprof- Figure 1
itable growth, superior value creation and market Three distinct acquisition strategies based
leadership in far shorter time and at greatly reduced on deal size and frequency (illustrative)
risk, especially in industries in the opening and
scale phases of the consolidation race. Wise man-
agers will use acquisition factories to complement

Large
Multiple medium-
large M&A and organic growth programs. sized acquisitions
Classic
M&A
Mergers and Acquisitions Strategies from Buy and
build
Classic to Factory Primarily organic
growth and infrequent
It is useful to step back and consider the two
Deal size
big mergers
principal dimensions of external growthdeal
Primarily external
size and frequency. Three clusters of M&A strate- growth based on
gies emerge (see figure 1). Classic mergers such as multiple small
acquisitions
the failed DaimlerChrysler marriage are large,
one-off transactions. (For a fuller discussion, Acquisition
factory
see A.T. Kearneys Merger Endgame publication
Small

series.2) The second strategy, buy-and-build, is a

smaller but emerging cluster. Executives grow Low High
Deal frequency
their initial platform company via a series of Source: A.T. Kearney

larger acquisitions to benefit from the scale and

market power driving industry consolidation.
Both General Electric and financial investors such
as private equity firms have used this approach
successfully. (For more information, see Martin
Handschuhs 2008 buy-and-build study.) The
final strategy is the acquisition factory, which
involves a high number of smaller deals. Although
acquisition factories are still below the radar screen
of many executives, this strategy can be as effective
as the alternatives and is often easier to execute.
Follow Simple Principles to Create Value
As first movers, companies operating an acquisi-
tion factory can shape the consolidation of their
industry and realize organic growth at the same
time. Successful operators identify favorable
market conditions, such as the availability of
2
Graeme Deans, Fritz Kroeger and Stefan Zeisel, Winning the Merger Endgame: A Playbook for Profiting From Industry Consolidation (New York:
McGraw-Hill, 2002).
small acquisition targets in a fragmented industry,
and confirm that the target fits with their own
strategy and business model. They follow this set
of simple principles:
Leverage the relatively lower enterprise value
(lower multiples) of smaller companies
Focus the acquired business on the core busi-
ness model even if it leads to a limited loss of
revenue
Improve performance throughout the acquired
company in all functions, particularly by lever-
aging scale and centralizing most overhead func-
tions as well as by leveraging best practices in
the other functions
Acquisition factories create value by applying
an efficient serial acquisition process while also

2 build your own acquisition factory | A.T. Kearney

improving mainly the bottom-line performance of
the acquired business. The result: a significantly
higher valuation multiple with the integrated busi-
nesses compared to their stand-alone valuation.
Consider the following case study (see figure
2). A company with sales of US$1.4 million and
an earnings before interest and tax (EBIT) mar-
gin of 24 percent is acquired for US$2 million,
which reflects an EBIT multiple as acquired
of around six. Post-acquisition, the company
focuses on its more profitable core competencies
and sales drop to US$1.2 million. Yet the EBIT
margin rises to 43 percent. Combined with
active performance improvement, this transac-
tion created value in the range of 50 to 150 per-
cent, which yields an enterprise value of US$5.2
million and an integrated-company multiple
of about 10.
Successful acquisition factories keep busy.
Over a period of five to 10 years, they may do tens
or hundreds of deals. Accordingly, they need
a dedicated organizational entity as well as ongo-
ing resources and capabilities for target search,
acquisition and integration. Both the factory
organization and the company as a whole benefit
from the focus on small, hidden champions rather
than large-scale blockbusters or mega-deals. The
benefits of focusing on smaller companies occur
throughout and after the acquisition process.
Pre-acquisition and transaction phases.
These typically are quicker and require fewer
resources when dealing with smaller companies.
Target selection and evaluation criteria are clear.
Bidder competition is reduced and the target com-
pany is usually in the weaker bargaining position.
Due diligence and integration phases. Small
companies with few or simple products are
less complex. Due diligence teams have less to
examine and integration can take place more rap-
idly. Acquisition and integration risks are typically
lower and spread more broadly.
Value generation. Often exceeds industry
performance. Over the past 10 years, the 25 most
active acquirers in the A.T. Kearney Merger

Figure 2
The value of the acquired business can be doubled within one year by acquisition factories

Before acquisition After acquisition

Revenue: $1.4 million Revenue: $1.2 million

Value generation
EBIT: 24% through EBIT: 43%
acquisition factory

Purchase 50% to 150% Enterprise

price: $2.0 million value: $5.2 million

EBIT multiple: ~6 EBIT multiple: ~10

as acquired integrated company

Source: A.T. Kearney

A.T. Kearney | build your own acquisition factory 3

 Endgames database consistently outperform the
MSCI Index by double the growth rates.
Market presence. First movers who make
several acquisitions each year and integrate them
rapidly can instantly enhance their market pres-
ence. Leaders who shape a consolidating indus-
try can quickly gain market leadership and over-
whelm competitors.
Acquisition factories create value
by applying an efficient serial
acquisition process while also
improving mainly the bottom-
line performance of the acquired
business.
Learn from Successful Acquisition Factories
Success stories of companies operating an acquisi-
tion factory can be found across industries and
countries. Two particularly interesting examples
are the stories of Integrated Service Solutions, Inc.
(ISS) and what was formerly US Filter (in 2004 it
became a part of Siemens).
ISS is one of the worlds largest facility man-
agement service providers, with market presence
in Europe, Asia, Latin America and Australia. The
Danish company employs more than 400,000
people and serves more than 100,000 business-to-
business and public-sector customers in 50 coun-
tries. ISSs services include shop floor and office
cleaning, maintenance, catering and security.
In many markets, ISS faces strong competition
4 build your own acquisition factory | A.T. Kearney
due to low entry barriers in cleaning and related
services. Since personnel expenses are the primary
cost driver, competitors undercutting minimum
wages and pursuing questionable labor practices
are key challenges for ISS.
Foreseeing the global trend of outsourcing
facility services to external providers, ISS started
its acquisition factory in 1997. It initially targeted
companies that were in or close to
their core business of facilities
cleaning, later targeting more
diversified areas such as catering
and security.
ISSs strategy aimed to build a
full-service network and increase
customer value by offering a one-
stop, integrated offering for all
relevant facility services. Their cen-
tralized customer relationship man-
agement enabled increased service
quality and streamlined processes.
Also, the strategy enabled ISS to
expand regionally, gaining access to
overseas markets. Meanwhile, the
company acquired more than 450 small firms,
increasing sales to more than US$11 billion. Most
acquisitions had revenues of less than US$19 mil-
lion when taken over. ISS made only two large-
scale acquisitionsAbilis in France in 1999 and
Tempo in Australia in 2006.
With its acquisition factory, ISS consolidated
the market substantially and continues to focus on
small acquisitions in order to minimize trans-
action and integration risks and to leverage local
market knowledge (see figure 3).
The second story is that of US Filter (now
Siemens Water Technologies). The company
operated a successful acquisition factory in the
fragmented water-technology industry of North
America that was characterized by small mom-
and-pop-like companies. The industry offers prod- chance to lead the consolidation process by using
ucts such as ultra-clean water and ion-exchange a standard, simple approach (search, acquisition
services. US Filter followed clear strategic princi- and integration of firms in or related to the core
ples that hold true for most companies operating business) in favorable market conditions (avail-
an acquisition factory: performance improvement ability of many small targets and low bidder com-
through enhanced utilization of facilities, rapid petition). Nevertheless, across industries and life-
centralization of administrative functions and cycle stages, an acquisition factory can complement
deployment of a standardized process. large-scale M&A, even in the later stages of mar-
Within three years, US Filter managed and ket consolidation.
integrated around 70 takeovers in the United States Out of the many cases of successful acquisi-
and Canada, achieving a stable position as a mar- tion factories, we have extracted three key success
ket leader in water technologies with a network factors:
of over 120 facilities (see figure 4 on page 6). 1. Corporate strategy fits with the acquisition
factory approach. The more suitable the
Consider Key Success Factors market and business model, the greater the
An acquisition factory is most useful to com- opportunities and impact of an acquisition
panies in fragmented industries. According to factory. With respect to the market, the extent
A.T. Kearneys Merger Endgame database, these of industry consolidation is ideally low to
are typically industries in the opening and medium, with only few competitors following
scale phases, such as telecoms, insurance and a similar strategy (first-mover advantage). With
utilities. Companies in these stages have the best respect to the corporate or divisional business

Figure 3
Integrated Service Solutions A/S has achieved a combination of solid growth and sustainable profitability

Financial data Market

600% 20% Fragmented facility services market

Sales
Dominant trend of outsourcing facility services
Operating profit margin

500% Operating to external providers

profit 15%
margin CAGR
400% 18.9% Strategy
Revenue

300% 10% Development of a full-service provider through acquisitions

Access to new geographic markets through acquisition
200% of firms
5%
Integrated facility services as a unique selling
100%
proposition in regional markets
0% 0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Result
Number of 13 22 31 50 54 22 38 78 64 25 397 More than 300 acquisitions since the year 2000
acquisitions
Total revenues of $11 billion in 2006
Overall Average
$5.7 $14.3 2006 $11.0 About 75% outperformance of Copenhagen 20 Index
value of value of
billion million revenues billion
acquisitions acquisitions between June 2005 and January 1997

Source: A.T. Kearney

A.T. Kearney | build your own acquisition factory 5

 model, the acquirer should be able to centralize
and apply its model to various acquisitions.
2. Target selection process is systematic. A sys-
tematic and continuous market scan, screening
and selection process supported by modern
decision tools can deliver high-quality targets.
Such a process should also result in more
successful takeovers executed faster and with
less risk than when targets are chosen opportu-
nistically or reactively. The process includes a
clear evaluation scheme and catalog of criteria
to long- and short-list smalleror equally-
sizedcompanies in similar or complementary
market segments. The targets should enhance
and possibly complete the buyers offering and
service portfolio and increase market share.
Commonly used criteria in choosing a target
company are:
Typical minimum company size must be
between US$1.5 and US$5.8 million based
on the purchase value
Figure 4
US Filter has built its nationwide service business by a series of about 70 small acquisitions
US Filter service network
Regeneration
facility
Branch
office
Source: A.T. Kearney
6 build your own acquisition factory | A.T. Kearney
Business focus is in line with the business
model
Regional business is in line with the business
model
Current business is stable
Risk of losing people and experience must
be moderate or low
3. Implementation is based on a standardized
integration framework. The target should be
integrated rapidly based on best practices from
acquisition experience and lessons learned in
the past.
Figure 5 displays some of the typical situations
companies face and a standardized and optimal
approach to deal with them. Companies can cap-
ture synergies and upgrade performance by central-
izing, consolidating and instituting initiatives such
as better labor utilization. Another execution
element may be to outsource non-core activities,
accepting a loss in revenues. However, integration
teams should not only focus on cost synergies and
Market
Fragmented service industry for ultra-clean water
and ion-exchange services
Market dominated by "mom and pop" shops
Strategy
Improve profitability of acquired businesses
Centralize administrative functions quickly
Enhance utilization of facilities
Deploy standardized processes
Result
Strong growth through around 60 acquisitions in
a period over two to three years
Nationwide network with 118 facilities
Stable positioning as market leader
Figure 5
A consistent consolidation approach is vital for business success (client example)

Client experience Optimized and standardized approach

1. Centralization of technical facilities leads to
Consolidate fixed assets
a reduction in cost by up to 50%
2. Scope of integration includes payroll, fringe benefits,
vehicle leasing, accounting/IT and common brand Quickly create administrative center
3. Labor utilization is a key metric and needs to be
supported by an IT system Centralize accounting, cash and IT systems immediately
4. Customer interface needs to be local
5. Understanding customer profitability is critical with Maintain local customer relationships
thousands of small customers
6. Only a few managers stay after an acquisition (two Prepare for management turnover
out of 50 within 17 acquisitions)
7. Revenue decreases by 10% due to a lack of fit Consider the loss of revenue in purchase price

Source: A.T. Kearney

bottom-line activities to create value, but also
on actions that enable profitable growth, by setting
clear priorities for short-term growth and by
strengthening the sales and marketing function.
Among these measures are maintaining local
customer interfaces and preparing for management
turnover, through non-competition clauses.
The Efficiency of an Acquisition Factory
Companies across all industries can learn from the
systematic and efficient approach underlying an
acquisition factory. At the right time and with
careful strategic alignment, this industrial-process
approach to M&A produces profitable growth and
value generation faster and with less risk than
other strategies, resulting in industry leadership.
However, we recommend keeping large M&A
opportunities and organic growth moves in mind
as well. The acquisition factory is not a stand-
alone strategy. Companies can combine these
strategies to maintain their growth momentum
under changing market and economic conditions.3

Authors
Jrgen Rothenbcher is a partner and head of the firms strategy practice in Europe. Based in the Munich office, he can
be reached at juergen.rothenbuecher@atkearney.com.
Martin Handschuh is a principal and a member of the firms utility practice in Europe. Based in the Stuttgart office,
he can be reached at martin.handschuh@atkearney.com.
Sandra Niewiem is a consultant and member of the firms strategy practice in Europe. Based in the Frankfurt office,
she can be reached at sandra.niewiem@atkearney.com
Michael Maxelon is an alumnus of the firm and now acts as the spokesman of the board at SWK Netze, a utility
company, in Krefeld.

3
The acquisition-factory approach is based on a worldwide consulting engagement experience and A.T. Kearneys Merger Endgames database of more than
13,000 mergers and acquisitions that took place over the past decade. The team focused on the top 25 acquirers and examined more than 300 deals in detail.

A.T. Kearney | build your own acquisition factory 7

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