If some Fortune 500 technology company just bought an AV manufacturer, or if a private equity firm purchased your rival, does either event actually affect you in a business sense? Rarely does a week go by without a business owner expressing concern to me because he or she heard about a merger in their business space and wonders what it means. I thought I would share the most frequently conveyed fears and shine some light on them.
Am I missing out?
Maybe. Are you jealous of someone else’s big payday? Or, do you want to earn year after year? Do you like unlimited earning potential? How do you feel about risk these days? Do you suddenly want out?
An acquisition (or sale, depending on your perspective) is a gamble on who will guess better—the buyer or the seller. Anyone that sells their business is trading future earnings for cash now (or some combination of cash and remaining equity). A buyer is trading cash for the potential they see, which might be different from the seller’s perspective.
I am sometimes asked, “Why couldn’t this be me?” It could be if you wanted. Are you strategically attractive to buyers? Do you “know” the right people? Are your expectations of value reasonable? Do you understand what you are giving up? Relax. The world is not going to run out of money. Your time will come if that is what you want.
Remember this: If you want to be bought out (or attract an investor) there are practical things you need to do. Ironically, they are the exact same things you should be doing already: Get your house in order. Have a management team in place. Show a clear pattern of growth and profitability. Document your processes. Nothing much to it. Get started.
Will these companies do business differently?
I hear this most often in regard to manufacturing mergers. Many integrators have strategically and philosophically aligned themselves with specific product lines and distribution channels. Channel disruption is very personal to them. I remind my clients that the only constant in distribution is disruption, and the trend lines I am observing all lead to the demise of the traditional dealer model, which will be replaced by a high-touch distribution model. You are welcome to disagree with me, but follow the money: Dealers are expensive to support. Distributors take a huge load off of manufacturers in terms of marketing and product support. If it looks more efficient, then expect it to happen.
So yes. Expect companies to change after a merger. However, investment deals do not necessarily trigger major changes. If a company takes on an investment partner (as in private equity), the majority ownership might change, but management usually doesn’t (at least as long as they continue to be effective).
Will this make competition more difficult?
Of course it will. Competition will always try to make your life more difficult. They are not going to "just be happy with their share." This is what free markets do. M&A deals tend to happen because the potential looks promising to the investor. The deal has to be a good risk, but I don’t believe that anyone would invest in a low-margin, high-risk systems integration company and hope for the status quo. An investor is going to expect growth and higher margins—a tricky combination in the dog-eat-dog world of permanent installations.
In a merger in which one integrator absorbs another, the increased value will be in market share, redistribution of resources, and efficiencies of scale. Market share might improve buying power almost immediately, but the other two take time. Merging multiple operations is generally quite messy – especially if the merging entities are new to the process.
If I were in your position and my competitor was just purchased or took on a major investor, I’d expect them to lower pricing in the short term, cut more corners operationally to make up margin, and probably flounder around a bit trying to adjust their sales message. My response would be to look stable, act confident, and stick to my margins by emphasizing the customer experience and overall value of your services.
Isn’t consolidation bad for competition?
Not necessarily. Consolidation doesn’t always reduce the number of competitors. It often spawns more companies that are created as former employees start their own businesses. Also, bigger corporations tend to diversify. So two big integrators that merge might keep a large portion of their installation market share, but may also move into managed services. They will shed some less-important integration work and focus on the complementary revenue stream. Their optimization is your opportunity.
I tend to shrug at merger and acquisition activity. It’s intellectually interesting, but I don’t take it personally. Someone will get a big check, pay off their mortgage, and maybe even retire. Good for them. A younger executive may get a new role as a CEO. Good for her. Their lives just became more interesting. Now, get back to making your business the best it can be.
Tom Stimson MBA, CTS helps owners and management teams rediscover the fun and profit that comes from making better decisions about smarter goals. He is an expert on project-based selling and a thought leader for innovative business processes. Since 2006, Tom has successfully advised over two hundred companies and organizations on business strategy, process, marketing, and sales. Learn More at TRSTIMSON.COM
Typical M&A Deals Explained
There are three basic types of M&A Deals.
Employee Buy-Out: This is usually a financing deal. An investor or bank will fund the buyout of shares by employees. The original owner takes some cash and maybe retains some shares. The new company pays back the loan. Employee stock ownership plans (ESOPs) are a type of employee buy-out. Private equity investors that fund buyouts are called mezzanine investors. That is, they loan money and expect to be paid back, but if not paid back, their investment converts to equity. These deals are often used to create a quiet exit for the original owner.
Investment: When a private equity group or individual investor puts money into a company, they become a part owner. The amount of their investment will determine their share. The deals we hear about tend to be when an outsider buys a majority or controlling interest. Typically the seller remains in place as the operator, but not always. When an investor buys a company that is similar to one they already own, they sometimes merge to the two entities.
Acquisition: Someone buys someone else. US Air bought American Airlines. In that transaction there could be any number of banking and financing deals. When Big Integrator buys Smaller Integrator, the buyer may get funding from banks, investors, their own balance sheet, the seller, or all of the above. Seller financed sales convert some portion of the purchase price to a note or other obligation. The seller in effect acts as one of the banking entities usually in exchange for interest.
Many of the acquisitions we see in our industry are simply refinancing of debt: one private equity investor sells their shares to another private equity investor. It’s like banks selling mortgages—nothing much changes. When we become acutely aware of these deals is when the investing partner takes a majority or total ownership and replaces management with their own.