Exits And Acquisitions: Key Concepts For Successful Deals

Life Science Leader, August 2010

Merger and Acquisition transactions can be a viable alternative for accomplishing a number of strategic objectives in the context of building and realizing value for emerging growth and middle-market companies (those from start-up to several hundred million dollars in revenue). He takes a high-level view of the buy-side and sell-side processes and a framework for thinking about and planning each.

Exits

In many instances the distinction between selling a company (i.e. an “Exit”) and raising capital is measured by the amount of equity sold and the contractual rights obtained by the buyer.

Shareholders and partners may find a full or partial Exit attractive for many reasons, including:

•diversifying away the risk of having too much personal net worth in a single asset

•minimizing the risk of growth by obtaining a financial or strategic partner

•buying out passive partners and making room in the capital structure for management and employees without dilution to exiting active shareholders.

Several potential solutions exist, including recapitalization, sale to a financial buyer while keeping a minority stake, or an outright sale to a strategic or financial buyer with contractual rights for some level of future performance.

Acquisitions

Acquisitions can meet a number of goals if approached and executed as part of a long-term strategy. Some of the typical reasons executives pursue acquisitions include:

• to accelerate revenue growth

• to enter an adjacent market space

• to expand into a new geography or obtain a physical footprint in a new location

• to access new customers

• to access technology

• to strengthen the pool of talent and capabilities

• to complete or augment a product or service line

• to reduce costs

• to capture market share

• to prevent a competitor from gaining these advantages.

The first phase of a typical acquisition process addresses finding a target company to buy; this begins with the strategic plan that should lay the foundation to determine many of the parameters and the focus of the process. The second phase of the process is to structure the deal, close the transaction, and integrate the business.

The financing strategy to support the acquisition should initially be thought of in the context of the overall acquisition process and be defined as part of the acquisition strategy (phase one), understanding that the process will evolve and is somewhat iterative as knowledge is gained from the marketplace. However, if the deal requires external funding, management must consider a financing strategy, which typically begins with understanding the acquiring or buying company. This involves:

• determining its valuation and financial strength

• establishing financial objectives and benchmarks for vetting possible acquisitions

• determining parameters around how much the buyer can afford

• conducting internal discussions around an ideal or preferred deal structure

• establishing relationships with financing sources and obtaining buy-in regarding the acquirer’s plans

• obtaining evidence for potential sellers of the buyer’s ability to finance and close a deal.

Management should keep in mind the following core concepts as it takes an objective view and embarks on the acquisition process:

•Begin with the end in mind; set clear objectives and benchmarks to gauge attractiveness of potential target companies and particular deals.

•Develop the financing strategy up front, and establish relationships with likely sources of financing.

•Terms are likely more important than absolute valuation.

•Align the financing strategy with the operating/integration plan and deal structure.

•Focus on value creation.