The food and beverage industry remains fiercely competitive, the impact of the sharp increases in input prices in recent years, pricing pressures from suppliers, exchange rate volatility, together with the economic downturn have all affected the sector. However, it has maintained the most consistent level of production of all manufacturing sectors in the UK. (Source: ONS)
The requirement for business planning and ongoing strategy reviews in the current economic climate has never been more imperative. Successful companies continually look for opportunities to gain market share and face the decision of whether to grow organically, or by acquisition, and both strategies require careful planning.
Acquisitions have dominated transaction activity in the food and beverage sector in recent years. All too frequently considered the exclusive domain of the largest companies, growth by acquisition is also often appropriate for smaller and medium sized companies. Growth via acquisition is regularly quicker, cheaper, and a far less risky proposition than that of the more conventional approach of organic growth. In a difficult economic environment, the acquisition of a pre-existing manufacturing base, brand, new product offering, customer base, or distribution channel is even more appealing.
Benefits of a strategic acquisition
Potentially eliminate competition
Access wider distribution channels and a wider supplier base
Diversify into a new product range
Access to new product development capabilities
Economies of scale
Access to new manufacturing facilities
Obtain a complementary product offering
High speed access to resources
Before commencing with an acquisition process, management needs to consider what it wants to achieve from such a strategy. Is it to increase market share, access new markets, add a new product range, or brand, or to benefit from synergies such as economies of scale? These questions are key in order to ensure the right targets are identified, at the right time, for the right price.
Financial performance will be a key consideration, but it is crucial not to lose sight of some of the more intangible factors such as the alignment of culture and values of the two businesses. It is important to assess the capabilities of people within the business to manage the process and the post-acquisition integration without it having a detrimental effect on the existing business. An unformulated integration plan and lack of management post-acquisition is the biggest cause of failure.
The process of finding acquisition targets cannot be under-estimated. Direct competitors will be the easiest target because these are often known but when entering new markets and geographies, access to market intelligence is key in the identification process. The identification process can involve research on several hundred companies before a shortlist of potential targets is drawn up. Trusted advisers will be invaluable at this point, not only to prevent diversion of management’s time and focus from the core business, but they will have access to leading market data and will assist in developing and reviewing a target list – particularly as they will usually have a feel for what is currently “on the market” or which companies might be attracted by an “off market” approach.
The “approach” is often a sensitive matter and should be thought through carefully in terms of the best route. Depending on the circumstances the use of a good corporate adviser to provide advice on valuation and to make initial contact, may be the best way forward. This approach has the advantages of maintaining confidentiality and providing an independent view.
Another important consideration in the acquisition process is how the acquisition will be financed. Credit conditions for SMEs have been difficult since the middle of 2008 when the economic crisis started to affect bank lending, although there has been a steady increase in liquidity within the debt markets in recent months and banks have become more willing to lend to companies with strong balance sheets, proven business models and strong cash generation. These are attributes which are often present within food and beverage companies. The presentation of the proposal to potential funders is vital to successfully securing funding in the current market. This involves instilling confidence in funders that the business plan for the acquisition is deliverable.
It is important to recognise that there are a number of risks to consider when undertaking an acquisition. As previously mentioned in this article a key consideration is the cultural fit between the companies involved in the process. A lack of integration post acquisition can quickly erode any perceived benefits. Failure of the due diligence process to identify problems is also a risk associated with the acquisition of another company. A detailed due diligence process is a necessity not an option. There are numerous examples of where normal due diligence procedures, if undertaken, would have reveled problems that presented themselves post acquisition. The process of undertaking an acquisition can be long, time-consuming and stressful. Project fatigue, which causes management to decide on an acquisition target just to get the task over with is a significant reason for the failure of a number of acquisitions.
A good corporate finance adviser will be key during the acquisition process. They will project manage the transaction, minimise potential risks and ensure it is funded and structured in the most appropriate manner.
Gambit specialises in assisting shareholders and management teams in formulating acquisition strategies, identifying potential targets and exploring and securing finance packages, including working with private equity houses, should this be a suitable alternative to bank funding. We welcome the opportunity to discuss your business and shareholder objectives on a confidential basis and to determine if Gambit can add value in implementing your growth objectives.