When reviewing an orgnisation's options for growth there is a choice between Organic Growth and non-Organic Growth. The content below will deal with non-organic growth, sometimes referred to as Mergers and Acquisitions (M&A). Although the definition of non-organic includes options which are not M&A, these are acknowledged below but not dealt with in any detail here.
Organic growth options are defined as growth from within where additional capacity is created for growth such as additional operating space, additional units / factories / offices, setting up business in a new region or location. Non-organic growth options are alternatives which fall outside this definition and are external to the current business.
The options for non-organic growth include, but are not exclusive to, the following:-
MERGERS & ACQUISITIONS:- Merger, Acquisition, Takeover & Reverse takeover
OTHER ALTERNATIVES:- Franchise, Agency / distributorship, Selling / manufacturing under licence, Strategic alliances
DEFINITIONS
MERGER - one organisation formally joins with another. Although the term is still used widely, there is rarely an equally yoked merger (50:50). Inevitably one party tends to control more of the merged business than the other and mergers realistically sit of a spectrum from Merger to Takeover.
ACQUISITION - one organisation purchases the assets, shares, intellectual property of varying degrees of all three from another party or organisation.
TAKE-OVERS - one organisation takes over the operations and business of another, generally a larger company taking over a smaller one (takeover\0. Alternatively, a smaller organisation with a unique business strength acquires a much larger one, with external financial backing, seeking to use the unique strength to make the larger organisation more successful and profitable than it might otherwise have been.
OTHER ALTERNATIVES - these can be loosely summed up as mechanisms to sell products of another organisation under a defined legal agreement. Franchises normally entail strict rules e.g. product specification and marketing activities,plus purchasing at agreed prices from the franchiser. Agency and distributors tend to be used where a group of end resellers already have a tried and tested route to the end customer. strategic alliances tend to be used where each business has a unique benefit over the other e.g. geographic presence, but there is a common ground for selling each others' products without detriment to each other's core businesses.
The aim in this section is not to try and regurgitate the wealth of knowledge and expertise contained in the mass of text books and written matter on the subject; or, to cover up to date regulations under the FSA banner intended to protect "unprotected" potential purchasers. Moreover to remove some of the clouds certain professionals like to enshroud this area (perhaps in the furtherance of fee protection ?) and to illustrate how M&A activities can be reviewed with some sense of simplicity and common sense.
GENERIC EXAMPLES - download a generic Excel based business acquisition model here
To focus the mind we will use the example of purchasing a residential property (an activity quite common for an adult to undertake and easier to comprehend than the acquisition of a business or corporation) and liken it to the purchase of a company. Any analysis referred to can be found in the associated Microsoft Excel file accessed here.
The business acquisition headings below with blue text are those which have a associated content in the hyper linked Excel file. This file is not intended to replace and devalue the detailed analysis required for an acquisition - however it will assist in the comprehension of the task and aid Entrepreneur's in getting the process started without incurring masses of professional fees.
| House Purchase | Business Acquisition |
| Desire to move house | Decision to grow via acquisition |
| Determine location | Determine target business location |
| Determine size & type of house | Define size & type of business |
| Define must have & nice to have features | Business features / attributes |
| Likely price vs budget | Review likely target prices & own budget |
| Search for potential properties | Research possible target businesses |
| Evaluate properties against requirements | Evaluate targets against acquisition criteria |
| Determine to do list & budget for all potentials | List issues with each target & integration plans |
| Determine value of each property | Assess value of each target & its potential |
| Source finance required | Review deal structure & finance sources / options |
| Make an offer on a target property | Preliminary approach & offer to target #1 |
| Haggle on price & fine detail | Agree heads of terms & complete due diligence |
| Legals & searches | Draw up a contracts & review / agree terms |
| Exchange contracts & complete purchase | Exchange contracts & complete purchase |
DEAL STRUCTURES & TIMING
The exact way in which a company merger or acquisition is structured can range from pure simplicity (an agreed price, paid in cash with no strings attached) to the infinitely complicated (financial ratio trigger points, penalty clauses, re-valuation issues, consideration in cash and shares).
One needs to appreciate that the resulting structure of any deal is the product of a negotiation game - the seller aiming for cash consideration and no ties, the purchaser aiming to mitigate any potential unforeseen issues and pay the consideration as cheaply and as far down the road as possible.
Due diligence of the target company's activities, assets and operations is the key in this area and the skill of the enquirer (sometimes even luck playing a large part) being paramount. Even with the best plans in the world the TIMING of a deal (susceptible to market and environmental factors and even acts of God) can totally alter the initial shape and potential of the deal.
