Where does a middle market company begin to look for growth acquisitions in such an immense pool of potential add-on candidates, let alone find the best ones?
Beginning a roll up strategy can be a daunting task to even the most experienced and savvy management team if acquisitions have never before been part of their corporate development plans. Sometimes buying companies just isn’t necessary until organic growth has stunted. I posed the question to Axial member Bart Blohowiak of The Fisher-Barton Group, “If you had to start from scratch to start pursuing an acquisition strategy in the middle market, how would you do it?”
I held the phone away from my ear half-holding my breath as I expected a response quite different – maybe beginning with a chuckle – and more hypothetical than the one he offered.
“Well, we actually did that,” Bart said. “We were growing the company organically until 2010 before we decided to start doing add-ons and had to relearn the process.” As we talked about the sourcing process, Bart touched on three ways to generate deal flow for strategic acquisitions in the middle market.
Hire an Investment Banker
Traditionally, acquirers begin a roll up strategy by retaining an investment banker to seek out opportunities and share the relevant ones that come across their desks. Yet some buyers, especially smaller ones, sometimes perceive that bankers cater to bigger players with deeper pockets and longer deal pipelines, and are wary. “Reaching out to investment bankers is just one part of the strategy,” Bart said. “We are basically paying them a finder’s fee. Who are they going to represent when the deal goes into action? It seems that a big company can hire a banker and get preferential treatment.”
While this thought isn’t necessarily true, it is a natural and likely a common sentiment for a smaller acquirer competing against the big guys. Thus it is important to find the right middle market banker with a strong reputation who you can trust.
Invest Time to Maintain Personal Relationships
Another option is to internalize the investment banking function and to directly engage potential targets. Relationships drive M&A and are part of the core foundation of successful long term deal origination strategies. Often, the process takes years of the respective management team’s time collaborating with and communicating with one another until a deal makes sense.
Thomas Franco, partner at prominent PE firm Clayton Dubilier & Rice, said at the Yale School of Management Private Equity conference in October, “In our model we have always pursued a long-dated sourcing strategy. It takes on average maybe 3 years from our first contact with management until the deal comes to fruition.” He referenced his firm’s purchase of 60% of Ingersoll Rands’ Hussmann subsidiary. “One of the deals we completed was a refrigerated display business (Hussmann) from Ingersoll. We first took a look at it in the nineties. The gestation period for these deals can be quite long.”
This may be an extreme case, but it is an insightful anecdote of a long courtship and of really becoming comfortable with a business and its managers before bringing them into the fold.
Join a Network
Mr. Franco’s example demonstrated the importance of the long-cultivated relationship in M&A. Being present on a network increases the size and scope of people you can meet and get to know and who you can perhaps transact with in the future. “Nothing will replace a handshake, but interacting on a network can help put a face to a name before meeting,” Bart said. Networks increase your visibility into the types of transactions you desire and parties surrounding them, and foster introductions that lead to valuable relationships. “You’ve got to reach out and get in front of these people or else you fall off the radar,” said Bart.
“Part of the battle is trying to get deals to come to you. A network is a good way to get our acquisition criteria out there and keep us on the radar. There are a lot of times when we send our stuff to bankers and aren’t sure if we’re getting on their radar. Being on a network presents a good way to get in front of advisors without emailing them every quarter; as long as we maintain our profile the way it is supposed to be maintained, they’ll find us,” he concluded.
M&A is a relationship business. Success and doing deals depends on what you know, who you know, how well you know them, and timing. High quality real-time networks increase your relationship potential by providing a way to discover and transact with counterparties you never knew had interests aligned with yours at a high value moment in time.
These aforementioned strategies are not mutually exclusive; how you choose to blend them is entirely up to you.