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Build Your Own

Acquisition Factory
An unconventional way to sustainable growth and market leadership
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 after the deal.1 Prominent M&A failures, such as
of profitable growth, whether organic or external. Daimler and Chrysler, Adidas and Salomon
Under ideal conditions for organic growth, Sports, Siemens and Nixdorf, and TimeWarner
companies zero in on growing markets and mar- and AOL, underscore the challenges. Typically,
shal their internal resources wisely. When markets the larger the deal, the tougher the challenges
are saturated or management capacity is stretched the larger the parties, the higher the organizational
too thin, organic growth falters and external complexity and the stronger the corporate culture
growth through mergers and acquisitions (M&A) of each party. Money and executive attention are
becomes more attractive. diverted toward managing a big deal, integrating
However, both mergers and acquisitions are a complex organization and capturing synergies,
riskier than organic growth. M&A research over and away from markets and customers, thus ham-
decades has long shown that only around half of pering profitable growth.
all deals actually create value. The other half There is another route to sustainable growth
destroys it. A recent A.T. Kearney study identified and market leadership. Acquirers can acceler-
an average value loss of 2.5 percent, measured by ate growth by using a serial, standardized acquisi-
the decrease in market capitalization against tion and integration strategy that we call the
industry peers over a three-year period before and acquisition factory. Our research shows that an
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.

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

Multiple medium-
large M&A and organic growth programs. sized acquisitions
Mergers and Acquisitions Strategies from Buy and
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
the failed DaimlerChrysler marriage are large,
one-off transactions. (For a fuller discussion, Acquisition
see A.T. Kearneys Merger Endgame publication

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

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

improving mainly the bottom-line performance of ing resources and capabilities for target search,
the acquired business. The result: a significantly acquisition and integration. Both the factory
higher valuation multiple with the integrated busi- organization and the company as a whole benefit
nesses compared to their stand-alone valuation. from the focus on small, hidden champions rather
Consider the following case study (see figure than large-scale blockbusters or mega-deals. The
2). A company with sales of US$1.4 million and benefits of focusing on smaller companies occur
an earnings before interest and tax (EBIT) mar- throughout and after the acquisition process.
gin of 24 percent is acquired for US$2 million, Pre-acquisition and transaction phases.
which reflects an EBIT multiple as acquired These typically are quicker and require fewer
of around six. Post-acquisition, the company resources when dealing with smaller companies.
focuses on its more profitable core competencies Target selection and evaluation criteria are clear.
and sales drop to US$1.2 million. Yet the EBIT Bidder competition is reduced and the target com-
margin rises to 43 percent. Combined with pany is usually in the weaker bargaining position.
active performance improvement, this transac- Due diligence and integration phases. Small
tion created value in the range of 50 to 150 per- companies with few or simple products are
cent, which yields an enterprise value of US$5.2 less complex. Due diligence teams have less to
million and an integrated-company multiple examine and integration can take place more rap-
of about 10. idly. Acquisition and integration risks are typically
Successful acquisition factories keep busy. lower and spread more broadly.
Over a period of five to 10 years, they may do tens Value generation. Often exceeds industry
or hundreds of deals. Accordingly, they need performance. Over the past 10 years, the 25 most
a dedicated organizational entity as well as ongo- 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 due to low entry barriers in cleaning and related
MSCI Index by double the growth rates. services. Since personnel expenses are the primary
Market presence. First movers who make cost driver, competitors undercutting minimum
several acquisitions each year and integrate them wages and pursuing questionable labor practices
rapidly can instantly enhance their market pres- are key challenges for ISS.
ence. Leaders who shape a consolidating indus- Foreseeing the global trend of outsourcing
try can quickly gain market leadership and over- facility services to external providers, ISS started
whelm competitors. its acquisition factory in 1997. It initially targeted
companies that were in or close to
their core business of facilities
cleaning, later targeting more
Acquisition factories create value diversified areas such as catering
and security.
by applying an efficient serial ISSs strategy aimed to build a
full-service network and increase
acquisition process while also customer value by offering a one-

improving mainly the bottom- stop, integrated offering for all

relevant facility services. Their cen-
line performance of the acquired tralized customer relationship man-
agement enabled increased service
business. quality and streamlined processes.
Also, the strategy enabled ISS to
expand regionally, gaining access to
overseas markets. Meanwhile, the
Learn from Successful Acquisition Factories company acquired more than 450 small firms,
Success stories of companies operating an acquisi- increasing sales to more than US$11 billion. Most
tion factory can be found across industries and acquisitions had revenues of less than US$19 mil-
countries. Two particularly interesting examples lion when taken over. ISS made only two large-
are the stories of Integrated Service Solutions, Inc. scale acquisitionsAbilis in France in 1999 and
(ISS) and what was formerly US Filter (in 2004 it Tempo in Australia in 2006.
became a part of Siemens). With its acquisition factory, ISS consolidated
ISS is one of the worlds largest facility man- the market substantially and continues to focus on
agement service providers, with market presence small acquisitions in order to minimize trans-
in Europe, Asia, Latin America and Australia. The action and integration risks and to leverage local
Danish company employs more than 400,000 market knowledge (see figure 3).
people and serves more than 100,000 business-to- The second story is that of US Filter (now
business and public-sector customers in 50 coun- Siemens Water Technologies). The company
tries. ISSs services include shop floor and office operated a successful acquisition factory in the
cleaning, maintenance, catering and security. fragmented water-technology industry of North
In many markets, ISS faces strong competition America that was characterized by small mom-

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

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

Dominant trend of outsourcing facility services
Operating profit margin

500% Operating to external providers

profit 15%
margin CAGR
400% 18.9% Strategy

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

Access to new geographic markets through acquisition
200% of firms
Integrated facility services as a unique selling
proposition in regional markets
0% 0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Number of 13 22 31 50 54 22 38 78 64 25 397 More than 300 acquisitions since the year 2000
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 Business focus is in line with the business
and apply its model to various acquisitions. model
2. Target selection process is systematic. A sys- Regional business is in line with the business
tematic and continuous market scan, screening model
and selection process supported by modern Current business is stable
decision tools can deliver high-quality targets. Risk of losing people and experience must
Such a process should also result in more be moderate or low
successful takeovers executed faster and with 3. Implementation is based on a standardized
less risk than when targets are chosen opportu- integration framework. The target should be
nistically or reactively. The process includes a integrated rapidly based on best practices from
clear evaluation scheme and catalog of criteria acquisition experience and lessons learned in
to long- and short-list smalleror equally- the past.
sizedcompanies in similar or complementary Figure 5 displays some of the typical situations
market segments. The targets should enhance companies face and a standardized and optimal
and possibly complete the buyers offering and approach to deal with them. Companies can cap-
service portfolio and increase market share. ture synergies and upgrade performance by central-
Commonly used criteria in choosing a target izing, consolidating and instituting initiatives such
company are: as better labor utilization. Another execution
Typical minimum company size must be element may be to outsource non-core activities,
between US$1.5 and US$5.8 million based accepting a loss in revenues. However, integration
on the purchase value teams should not only focus on cost synergies and

Figure 4
US Filter has built its nationwide service business by a series of about 70 small acquisitions

US Filter service network Market

Fragmented service industry for ultra-clean water

and ion-exchange services
Market dominated by "mom and pop" shops


Improve profitability of acquired businesses

Centralize administrative functions quickly
Enhance utilization of facilities
Deploy standardized processes

facility Strong growth through around 60 acquisitions in
Branch a period over two to three years
office Nationwide network with 118 facilities
Stable positioning as market leader

Source: A.T. Kearney

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

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

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.

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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