by Elizabeth Hines | Aug 12, 2015 | Blog, Strategy, Supply Chain
With today’s merger and acquisition (M&A) activity at the highest level since 2007, up 38% over the same period last year, there’s been a great deal of shifting lately. In the high-tech industry, analysts are following a particular trend among original equipment manufacturers (OEMs) – mergers and acquisitions of niche aftermarket service industry participants. Electronic Purchasing Strategies writes about the aftermarket industry: “The aftermarket has long been just an afterthought to the sales and marketing processes but today more and more OEMs have finally begun to realize its strategic importance as a competitive differentiator.” These types of deals continue to become increasingly attractive because of the upside opportunities they present; consequently, acquirers need to fully understand the complexities involved in positioning their companies with such adjoining business growth.
What makes small, niche aftermarket service industry participants attractive?
In order to answer this, we must first understand the context of aftermarket services. When referring to the high-tech space, the term “aftermarket services” encompasses the services commonly referred to as technical support; field support; service parts logistics; electronics repair; asset recovery; data destruction; and e-cycling. These service markets have been historically served by specialized providers, each delivering their niche service offering (such as service parts logistics) to a select group of customers.
Typically, their customer density limits are bound by either a specific relationship base or the capital needed to adequately service their customers and keep them coming back. These companies can range in size from $10s of millions in revenue to $100s of millions in revenue (but typically fall between $20 million and $100 million in annual revenue). Due to the fragmentation of their service offerings and a size and geography limitation, this marketplace grew into a sizeable cottage industry with many participants servicing the major brands in the high-tech space. Even more interesting, their gross profit margins can range from approximately 25-to-50-plus percent. These margins are fairly sizeable in an overall industry that considers mid-teens as respectable gross profit margins. Due to these industry characteristics, it’s not hard to see why acquisition-minded participants in this space have been active.
What does a “typical” acquirer look like?
The typical acquirer of these aftermarket services companies is a billions-in-revenue national or multi-national organization. These organizations enjoy gross profit margins in the mid-teens and have typically grown through vertical consolidation methods through which they get bigger revenue numbers but similar financial results on a percentage basis.
What these larger acquirers bring to the table is cash to invest, a global customer base and a platform to service them from. What the aftermarket service company brings to the table is an adjacent revenue opportunity for the acquirer—as opposed to the historical vertical acquisition strategy—that comes with double or triple the gross profit percentage. When you spread that over the thousands of customers the acquirer has relationships with, it adds up quickly in terms of net income and earnings per share.
While that’s really good news, due to the fragmentation of the services marketplace, in order to have a robust offering and realize that potential, one needs to acquire more than a handful of these service providers. And that’s exactly what such large acquirers have been doing. They have been stringing together adjacent and complimentary services to their existing businesses, thus positioning themselves for margin expansion in the longer term—a winning strategy.
Is this truly bringing benefit to the marketplace for customers?
Let’s first look at it from each of the constituent’s perspectives. The customer now has the ability to access services for every phase of their product lifecycle—from design to de-manufacture and all of the services management portfolios in between. And if they choose, they can gain leverage by doing this within a handful of qualified vendors. Prior to these acquisitions, it was a multi-vendor, multi-geography, multi-service offering. Anyone who lived this will tell you that just the tracking of vendor performance will keep a team busy let alone leave time for any innovation in one area. Those economies alone would sell some purchasing professionals on the idea.
How do acquirers benefit from these types of acquisitions?
From the acquirer’s perspective, it enables new, more profitable and less commoditized ways to interact with existing customers and gain new ones. All of this activity should lead to higher levels of operating income as well as higher earnings per share all driven by the higher margin profile of these services. But because these acquisitions come in small “chunks,” acquirers need to be thoughtful about their target companies as well as their go-to market strategies. Developing synergies with existing sales and service teams goes a long way in this area.
What do aftermarket services industry participants stand to gain?
For aftermarket services industry participants, this M&A activity unlocks value for their businesses that would otherwise go unrealized. Most of these organizations run undercapitalized and with some level of debt service (long or short term). This activity allows owners and/or shareholders a way to break that cycle and reset their balance sheets. It also offers the opportunity to go beyond their historical customer and capital constraints and really grow their businesses in ways that would not have been possible without a strategic acquirer. Additionally, new participants now have an “end-game-strategy” as long as their business strategy, technical competency and service delivery are carefully thought out.
Looking forward: What are the predictions for both short & long-term growth?
In the short term, we will continue to see more acquisition activity in these areas. There are still good aftermarket service companies in the marketplace and there are still holes in the service offerings of the larger acquirers. As these activities mature, we will see the industry benefits mentioned earlier really begin to multiply. In the longer term, as the acquisition and go-to market strategies become more refined and the service offerings more fine-tuned, these benefits will really have a lasting impact on how customers access these services and from whom. Not to mention, the positive and long lasting bottom-line impact to the service vendor. The only thing left to do is execute.
Fronetics Strategic Advisors is a leading management consulting firm. When it comes to M&A, our firm is able to execute from target identification through post-deal integration and value creation. At Fronetics Strategic Advisors we work with our clients to build and capture value.
by Fronetics | May 25, 2015 | Blog, Strategy
M&A can be a strategic move to increase visibility, efficiency, and profits, as well as a smart way to plug missing capabilities within a company, reach new markets, and expand geographically. M&A activity in the past few years has been bustling in all sectors, seeing a rise in both the number of deals and the valuation of them. Given our awareness that so many deals can fall through for various reasons ranging from objections from regulators and consumer advocates to an unraveling of confidence within the two companies, the amount of deals that have recently been attempted and successfully completed is impressive.
In A Comprehensive Guide to Mergers & Acquisitions: Managing the Critical Success Factors Across Every Stage of the M&A Process, that authors point out that: “many research studies conducted over the decades clearly show that the rate of failures is at least 50 percent. In surveys conducted in recent years, the percentage of companies that failed to achieve the goals of the merger reached 83 percent.” If the odds are so great, and the payoff may not be fully beneficial, why has M&A been booming? Will we see the bubble burst in the coming years?
The M&A Boom
According to the 2014 Deloitte M&A Trends Report, “activity had flagged in 2012 amid economic malaise in certain European markets and key emerging markets, as well as uncertainty about health care and other regulatory and legislative matters in the United States.” In 2013, with the economy slowly seeing signs of improvement, M&A activity also started to strengthen.
As stated by Big Four auditor PriceWaterhouseCoopers, 2014 was a very strong year for M&A and 2015 is set to follow suit. Robert McCutcheon, PWC’s U.S. industrial products leader, claims, “CEOs are more optimistic about the state of the U.S. economy and growth prospects domestically. That CEO confidence coupled with historically low commodity prices, new advanced technologies and a skilled U.S. labor force will likely continue to give the U.S. industrial products sector competitive advantage in the marketplace. We believe that the U.S. manufacturing resurgence will also continue and M&A will be a big part of the industry’s growth prospect going forward.”
Thompson Reuters’ recent Mergers and Acquisitions Review indicated that worldwide M&A had increased by 47% from 2013 to 2014, and that North American M&A increased by 55% during this period. With many pointing to continued economic improvement for the rest of 2015 and into the coming years, and with 84% of corporate executives anticipating “a sustained, if not accelerated, pace of M&A activity in the next 24 months”, when might we see the mighty growth of M&A plateau or decline?
Recent Failures
One of the most current failures in manufacturing came when the Department of Justice found that combining business between American company, Applied Materials, and Japanese company, Tokyo Electron, would “restrict competition”. The $10 million deal fell through in late April. With so many requirements, restrictions, and reviews of high dollar deals, these disappointments are commonplace.
Despite megadeals – transactions worth more than a billion dollars—rising from 62 in 2013 to 95 in 2014, many larger companies attempt but can not successfully complete an M&A deal. Perhaps the year’s largest M&A collapse came when regulators and consumer advocates prevented a $4.5 billion deal between Comcast and Time Warner Cable.
Over the years there have been many unsuccessful M&A deals. New York Times article As Big Merger Deals Boom, So Do Big Failures, author William Alden points to some of the largest megadeals gone awry, with many of the most expensive deals collapsing in 2014. However, it makes sense proportionately that with more attempts each year will come more failures.
Predictions
Some people see the wave of optimistic financial news continuing into the next few years, while others worry about the coming year— an election year. In his Forbes article, author Michael Schwerdtfeger, writes, “one thing markets hate is uncertainty, and shifting expectations of the political future can impact uncertainty levels. Expect 2016 to be a much slower year for dealmaking than 2015 as buyers try to predict the election outcome.” As we enter the election campaign season, we’ll see if the political uncertainty, does, in fact, shift the impressive growth of M&A deals.
Fronetics Strategic Advisors provides M&A support to companies of all sizes. Our firm is able to execute from target identification through post-deal integration and value creation. At Fronetics Strategic Advisors we work with our clients to build and capture value.
by Fronetics | May 25, 2015 | Blog, Strategy
M&A can be a strategic move to increase visibility, efficiency, and profits, as well as a smart way to plug missing capabilities within a company, reach new markets, and expand geographically. M&A activity in the past few years has been bustling in all sectors, seeing a rise in both the number of deals and the valuation of them. Given our awareness that so many deals can fall through for various reasons ranging from objections from regulators and consumer advocates to an unraveling of confidence within the two companies, the amount of deals that have recently been attempted and successfully completed is impressive.
In A Comprehensive Guide to Mergers & Acquisitions: Managing the Critical Success Factors Across Every Stage of the M&A Process, that authors point out that: “many research studies conducted over the decades clearly show that the rate of failures is at least 50 percent. In surveys conducted in recent years, the percentage of companies that failed to achieve the goals of the merger reached 83 percent.” If the odds are so great, and the payoff may not be fully beneficial, why has M&A been booming? Will we see the bubble burst in the coming years?
The M&A Boom
According to the 2014 Deloitte M&A Trends Report, “activity had flagged in 2012 amid economic malaise in certain European markets and key emerging markets, as well as uncertainty about health care and other regulatory and legislative matters in the United States.” In 2013, with the economy slowly seeing signs of improvement, M&A activity also started to strengthen.
As stated by Big Four auditor PriceWaterhouseCoopers, 2014 was a very strong year for M&A and 2015 is set to follow suit. Robert McCutcheon, PWC’s U.S. industrial products leader, claims, “CEOs are more optimistic about the state of the U.S. economy and growth prospects domestically. That CEO confidence coupled with historically low commodity prices, new advanced technologies and a skilled U.S. labor force will likely continue to give the U.S. industrial products sector competitive advantage in the marketplace. We believe that the U.S. manufacturing resurgence will also continue and M&A will be a big part of the industry’s growth prospect going forward.”
Thompson Reuters’ recent Mergers and Acquisitions Review indicated that worldwide M&A had increased by 47% from 2013 to 2014, and that North American M&A increased by 55% during this period. With many pointing to continued economic improvement for the rest of 2015 and into the coming years, and with 84% of corporate executives anticipating “a sustained, if not accelerated, pace of M&A activity in the next 24 months”, when might we see the mighty growth of M&A plateau or decline?
Recent Failures
One of the most current failures in manufacturing came when the Department of Justice found that combining business between American company, Applied Materials, and Japanese company, Tokyo Electron, would “restrict competition”. The $10 million deal fell through in late April. With so many requirements, restrictions, and reviews of high dollar deals, these disappointments are commonplace.
Despite megadeals – transactions worth more than a billion dollars—rising from 62 in 2013 to 95 in 2014, many larger companies attempt but can not successfully complete an M&A deal. Perhaps the year’s largest M&A collapse came when regulators and consumer advocates prevented a $4.5 billion deal between Comcast and Time Warner Cable.
Over the years there have been many unsuccessful M&A deals. New York Times article As Big Merger Deals Boom, So Do Big Failures, author William Alden points to some of the largest megadeals gone awry, with many of the most expensive deals collapsing in 2014. However, it makes sense proportionately that with more attempts each year will come more failures.
Predictions
Some people see the wave of optimistic financial news continuing into the next few years, while others worry about the coming year— an election year. In his Forbes article, author Michael Schwerdtfeger, writes, “one thing markets hate is uncertainty, and shifting expectations of the political future can impact uncertainty levels. Expect 2016 to be a much slower year for dealmaking than 2015 as buyers try to predict the election outcome.” As we enter the election campaign season, we’ll see if the political uncertainty, does, in fact, shift the impressive growth of M&A deals.
Fronetics Strategic Advisors provides M&A support to companies of all sizes. Our firm is able to execute from target identification through post-deal integration and value creation. At Fronetics Strategic Advisors we work with our clients to build and capture value.
by Elizabeth Hines | Apr 8, 2015 | Blog, Leadership, Strategy
Mergers and acquisitions are increasingly popular strategies toward growth; however, 40% to 80% of mergers fail to meet objectives. M&A is complicated, and goes beyond simply “the process of buying a company.” At its heart it is a strategic selection of competencies that fill a void in a company’s offering, geography, technology, or industry area of focus. It’s wise to think about whether the time, money, and energy are ultimately going to pay off, literally and figuratively.
There are some critical things to consider before courting a merger or acquisition. Be a leader by asking the tougher questions internally rather than focusing your team on an outside “target”:
- Is there clarity around why a merger or acquisition is being considered? Will your organization reap strategic benefits or is this potential change only going to bring bonuses to the executives?
- Can your reorganization be better served by forming a strategic alliance instead? In this way, you get what you need without other non-strategic pieces that cloud merger and acquisition return on investment.
- Is there a licensing strategy that would work better than an acquisition strategy? Again, you can reach a beneficial goal without the expensive and time-consuming complications of a merger or acquisition.
- Are there other ways to access the marketplace, the capabilities, or the geography that you desire from the acquisition target?
After examining these questions, if the strategic decision points to a merger or acquisition, then strong leadership is critical. In the Deloitte report, The Leadership Premium, a survey of 400 stock market analysts ranked “senior leadership team effectiveness” as second only after “financial results” as the top criteria for judging company success. A detailed review of 94 different mergers revealed that leaders who oversaw a successful merger could:
- motivate others
- influence others
- build relationships
- develop others
- act with integrity
- show adaptability
- focus on customer needs
If acquiring leaders haven’t properly engaged with the target company before, during, and after an acquisition or merger, the likelihood of success declines. Confidence among employees of the acquiring and target companies can waiver throughout the acquisition process, and the same can happen during a merger. More than ever people will look to leadership for answers and guidance. Employees ask themselves: will I lose my job? Will I need to relocate? Will my position change? Will the workplace culture change? These answers will need to come, and for many employees, the earlier the better. A study found that “two of the top five most common reasons for M&A failure were down to management. These reasons were: poorly managed integration of people and culture (60%) and poorly managed integration of systems and processes (54%).”
From target identification to post-deal integration, leaders must become more involved with the steps necessary to make a merger or acquisition successful. Without such leaders, and their willingness to engage and guide, there could be no deal, or a very sour one.
by Elizabeth Hines | Apr 8, 2015 | Blog, Leadership, Strategy
Mergers and acquisitions are increasingly popular strategies toward growth; however, 40% to 80% of mergers fail to meet objectives. M&A is complicated, and goes beyond simply “the process of buying a company.” At its heart it is a strategic selection of competencies that fill a void in a company’s offering, geography, technology, or industry area of focus. It’s wise to think about whether the time, money, and energy are ultimately going to pay off, literally and figuratively.
There are some critical things to consider before courting a merger or acquisition. Be a leader by asking the tougher questions internally rather than focusing your team on an outside “target”:
- Is there clarity around why a merger or acquisition is being considered? Will your organization reap strategic benefits or is this potential change only going to bring bonuses to the executives?
- Can your reorganization be better served by forming a strategic alliance instead? In this way, you get what you need without other non-strategic pieces that cloud merger and acquisition return on investment.
- Is there a licensing strategy that would work better than an acquisition strategy? Again, you can reach a beneficial goal without the expensive and time-consuming complications of a merger or acquisition.
- Are there other ways to access the marketplace, the capabilities, or the geography that you desire from the acquisition target?
After examining these questions, if the strategic decision points to a merger or acquisition, then strong leadership is critical. In the Deloitte report, The Leadership Premium, a survey of 400 stock market analysts ranked “senior leadership team effectiveness” as second only after “financial results” as the top criteria for judging company success. A detailed review of 94 different mergers revealed that leaders who oversaw a successful merger could:
- motivate others
- influence others
- build relationships
- develop others
- act with integrity
- show adaptability
- focus on customer needs
If acquiring leaders haven’t properly engaged with the target company before, during, and after an acquisition or merger, the likelihood of success declines. Confidence among employees of the acquiring and target companies can waiver throughout the acquisition process, and the same can happen during a merger. More than ever people will look to leadership for answers and guidance. Employees ask themselves: will I lose my job? Will I need to relocate? Will my position change? Will the workplace culture change? These answers will need to come, and for many employees, the earlier the better. A study found that “two of the top five most common reasons for M&A failure were down to management. These reasons were: poorly managed integration of people and culture (60%) and poorly managed integration of systems and processes (54%).”
From target identification to post-deal integration, leaders must become more involved with the steps necessary to make a merger or acquisition successful. Without such leaders, and their willingness to engage and guide, there could be no deal, or a very sour one.
