Understanding where one is weak can prove to be a strength. This is especially true when the known weaknesses are eventually eliminated. When weaknesses are inherent in a company, it can create risks to the capital invested by shareholders and lenders. One way to overcome such weaknesses and risks is to eliminate them by acquiring complementing strengths. The following items showcase company weaknesses and risks that can effectively be remedied with a little M&A.
Regulatory & Legal Risks
- Companies in nonregulated industries could represent a fine target if a buyer is seeking to assuage some of the existing and burdensome compliance and legal issues. The reverse is also true. A company in a more pristine regulatory environment may be wholly unprepared when seeking acquisitions in a similar, but more regulated vertical.
- Poor union relations can be more easily be offset by acquiring a company in a similar, but less nonunion sector to help offset greater exposure to employee strikes.
- Market concentration risk can be reduced by acquiring a company with a less concentrated industry focus, further diversifying the market risk profile.
- Firms in a higher tax bracket can reduce taxation risk by acquiring a company with legitimate tax advantages. We’ve seen, helped and know of firms that have successfully done this work through the successful acquisition and restructuring of firms with high net operating losses. Other options are also available here.
- Weak intellectual property protection (e.g. trademarks, patents & copyrights) could be offset by acquiring or licensing the necessary patents to avoid later legal conflict over the lack of legal protection.
- When a firm has inferior or insufficient technology, a target acquisition may help to offset the lack thereof.
Business Cycle Vulnerability
- Annual or seasonal factors affecting revenue and profitability could be more easily assuaged by acquiring a company with summer products to offset winter products. Similar or inverse strategies for acquisition could be implemented to help smooth seasonal revenue fluctuations.
- Macroeconomic factors affecting company profits may likely be offset by acquiring a company that is not so dependent on economic booms to survive and thrive.
- Fast growth products (which incidentally could prove “flash-in-the-pan”) could be offset by products with slow and steady sales.
- A company with a single product with high margins may boast a more reduced risk profile if a company with a more broad range of products is introduced through acquisition.
High Employee Turnover
- Retirement or poaching could cause a massive intellectual drain on the company, which would likely cost a great deal. Acquiring a company with top talent will help to curb the brain drain.
- If the nature of a buyer’s business includes employees with a natural short tenure, it may be wise to buy a company with a more stable workforce.
- An industry with low barriers to entry may look to acquire a competitor to reduce the chance of new competition entering the market.
- Conversely, a company within an industry with closed exit may buy a company outside the industry to enable exit with a strategy shift. This can also be extremely risky, however.
Technology Change, Malfunction & Turnover
- When a company faces technology obsolescence or when a core product is due for a change, the acquisition of a company with solid tech could mean the difference.
- If a company finds itself prone to issues of cybersecurity or cyberattack, they may wish to acquire a company with strong security in this area to help assuage the risk.
Poor Marketing or Market Share
- A company with low market share may acquire another firm to improve its relative share within the industry.
- A low-margin business may wish to acquire a similar company with higher margins to offset the lack of profitability.
- A company with weaker marketing and sales may wish to buy one with a strong, superior approach or team.
- A company with a single supplier of its products may wish to reduce supplier power by acquiring a company with suppliers outside the current buyer’s wheelhouse.
- In retail, a company with inadequate shelf space may need to buy a competitor with better shelf space.
- A company with poor customer recognition and appeal may wish to acquire a company with more exposure and better brander to fill the void.
- Buying a company with a broader product mix may help to diversify the lack thereof within a buyer firm.
Poor Investor Relations
- Excessive debt or leverage may cause a buyer to seek a company with a lower debt-to-equity ratio.
- Volatile earnings may prompt a buyer to seek a target with more smooth and steady profitability to counter the cyclicality.
- Poor ties to lending institutions may prompt a company to acquire another similar business with stronger relationships to the right lenders.
- A lack of access to the equity markets may be remedied by buying a listed company that has a more prestigious, seasoned or secured listing.
- Poor reputation among investors is difficult to overcome, but the right acquisition could help to counteract the low or no reputation among existing or new investors.
Low Growth & Stagnation
- Low or slow sales growth can be offset by the right acquisition with stronger sales to increase gross revenues.
- Low or poor bottom-line profits may be improved by acquiring them from a similar, but outside firm.
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC, a middle-marketing M&A and capital advisory firm. Nate works with corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He holds Series 79, 82 & 63 FINRA licenses and has facilitated numerous successful engagements across various verticals. Four Points Capital Partners, LLC a member of FINRA and SIPC. Nate resides in Seattle, Washington. Check the background of this Broker-Dealer and its registered investment professionals on FINRA's BrokerCheck
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