Written By: Stephen Reisler
This decade’s M&A twists and turns will feel very different. As the decade ahead progresses, North American companies will continue to be increasingly acquired by foreign investors, particularly led by Chinese investors.
follow up article to Learning from the M&A roller coaster of the last decade, Stephen Reisler looks at trends in the new decade for company sales.
More accustomed to slow organic growth than to the North American preference of growth through acquisition, Asian companies will remain cautious in their approach to minimize their short-term risk of failure. Their perception on how to achieve M&A success is based on maintaining a long term strategy. They will forego the benefits of achieving immediate and quick synergies through M&A transactions for the longer term advantages of expanding into new and unfamiliar geographies, adding new product lines, and/or learning new capabilities. While the Chinese might still be inexperienced acquirers, their immediate goal will be to quickly learn how to operate effectively in new and unfamiliar situations. For instance, in acquiring a complete business in a new geography, they will likely value learning from the management skills of the acquiree, more than the opportunities for immediate gain through broad cost reduction efforts.
Prepare yourself and your business for different M&A motivations than in the past
In order to acquire our management knowledge, Chinese investors will, as unobtrusively as possible, likely focus only on those synergies that the acquired managers can envision. They generally will aim to capture value through their management oversight rather than to impose their own judgment.
Asian acquirers usually choose to reinforce the leadership team of an acquired company from its incumbent management, preferring to add selected local hires, while avoiding inserting into key roles their own people, who often lack the language skills and/or local experience needed. They prefer to manage acquisitions primarily through collaborative discussions with existing management teams to focus on performance potential and priorities of the business, while avoiding the intrusive scrutiny or pressure from seeking fast results.
Understand the changing dynamics of the economic landscape
Economic recovery will likely not be robust in North America and in Europe, due to a slowdown in consumer spending of an increasingly aging population. North American and European demographics which gave rise to the spending habits of post-war “baby boomers” were not mirrored in China, but with an increasing middle class in the Asia Pacific region now ready to consume, spending will create a much faster rate of growth there than here.
For years, our banks were the principal intermediaries in the credit markets for private businesses in North America and Europe. While their role hasn’t been eliminated, it has been clearly diminished. The question then arises: Who will drive the M&A ups and downs of the decade ahead? Will the Chinese be the new bankers to the world? Entrepreneurial investors everywhere, including the Chinese, will certainly find places to put their capital to work. This will stimulate M&A activity and sellers who choose to position themselves to fulfill the motivations of these new acquirers, will be the new winners. One might say that M&A activity in the decade ahead might be propelled by an alternative fuel source.
Previously, North American and European acquirers mostly targeted entrepreneurs looking to sell and cash out. Today, as I‘ve explained above, the “New Acquirer” has totally different objectives.
How prepared are North American companies to meet the new objectives of Asian acquirers who may wish to accumulate management expertise in learning how to better serve the hunger of a growing consumer class in their own home markets? While these acquirers might want to buy a successful business with a significant return on investment, they will also likely want to leverage the local management expertise, in order for them to adapt and use this knowledge at home in Asia. Given the increasing volume of cross-border deals by foreign acquirers, and the greater willingness amongst Asian companies to step outside their borders, the lingering question is: What should be the focus for local mid market companies wanting to best prepare for being acquired during the next ten years?
Whether or not a local entrepreneur wants liquidity to “cash out” and/or want to fund company growth to develop a new market, he must make his business attractive to these “New Acquirers”.
A succession planning strategy will be a key to aligning with new M&A
With Chinese investor triggered deals to come, expect them to opt for ‘minimalist’ governance structures, with a requirement to keep the core management team intact. Therefore, to be on the winning side of this new M&A activity, local mid market companies wanting to be acquired must learn to get succession planning right!
CEO succession should be a regular structured process. It then becomes a matter of routine, no more unusual than an annual compensation review. In fact, CEO succession planning should be a strategic process intimately related to company performance, and must include not only the CEO’s job, but also include all mission-critical positions of the organization. A company with a fair, objective, and transparent succession process will likely attract and retain top talent and will increase its attractiveness as an acquisition target.
If succession planning reveals a fundamental misalignment within the senior leadership team, that discovery can be a blessing in disguise if it happens early on, as they will have the opportunity to fix it prior to the approach of a prospective acquirer. Companies that fail to address these issues can become myopic, thinking that they have the talent they need when they don’t. Companies must think about the unthinkable. Who would be put in the place of the present leader in the event of sudden need? How many of our mid market companies have anyone identified or ready?
Role succession must be an ongoing process, not a one-time event. The company that waits to find its next leader and other key management team members only when unplanned for events demand it; will shortchange itself, its shareholders, and its future. Role succession must take into consideration a structure that will render the company attractive enough to meet the criteria of these new acquirers. This will put company owners in a prime position for that liquidity event that they’ve counted on their entire business lives. Well prepared, business owners will be in a prime position to cash out as the fervor of this decade’s M&A activity once again gains momentum.