How a Merger & Acquisition strategy can help to grow your distribution business

How a Merger & Acquisition strategy can help to grow your distribution business

How to grow from 1 to 17 billion in sales?

We have talked several times about the complexity of a distribution company and the importance of having a clear view of what you want to achieve with it over the years. I recently talked about 4 factors to consider in your 2022 business plan, but fixing a growth strategy is long-term planning. There is no single formula that tells you how to grow your company, but a model that has been used successfully in the past is based on a merger or acquisition strategy with successful companies that complement your business vision.

In this article, I will use the case of Wesco International to explain the basis of growth based on acquisitions and how to implement it.

What is a Merger & Acquisition strategy?

Merger & Acquisition strategy as a way to grow your distribution business is the process in which one company buys, sells, or combines with another company to achieve rapid growth in a competitive market. Both terms often refer to the joining of two companies, but there are key differences as to when to use them. A merger occurs when two separate entities combine forces to create a new joint organization; whereas acquisition refers to the takeover of one entity by another.

Examples of Merger & Acquisition strategy

Disney applied successfully this strategy to revitalize its platform when it acquired leading production companies like Pixar, Marvel, Lucasfilm, and 20th Century Fox. Each brought something different to the table. With Pixar, it acquired the world’s most advanced animation practices.  With Marvel and Lucasfilm, in addition to the large movie franchises, it acquired the merchandise rights to the films that it could market through its retail branches. And with 20th Century Fox, it acquired a hugely valuable back catalog.

Google also applied this strategy to challenge Microsoft’s leadership in the mobile app space by acquiring Android. After Google acquired Android, 54.5 Percent of U.S smartphone subscribers became users of Google´s Android devices. Overall, Google has acquired 238 organizations. Each move has allowed Google to either break into new markets or acquire new technology. The acquisitions of YouTube and Fitbit, along with Android, have been the latest moves.

But this strategy does not apply only to large corporations. Wesco International is the best example of how to make merger & acquisition strategy the core channel for growth. Wesco came to life in 1998 when the Cypress Group purchased what used to be the Westinghouse electrical supply company, going public in 1999. At the time they were just a supply company with sales of nearly $ 1 billion and 300 branches in the USA and Canada. From 1999 to 2005, management focused on increasing efficiency and effectiveness[1]. Since 2005 to now and after 12 key acquisitions, they grew into a $17 billion revenue company with more than 18,000 employees, 800 branches in 53 countries, and more than 150,000 customers, 50% of which are Fortune 500 companies.

[1] From the 2020 10K annual report,

What are the benefits of an acquisition strategy?

As previously mentioned, using a merger & acquisition strategy for business growth helps companies make substantial progress in a short time. Think about how long it would take for a company to expand internally by developing new products or services, expanding to other states and countries, and hiring and training new team members. It would often take considerably longer for the company to yield growth and financial results than it would if it acquired an existing company that has already achieved that.

Additional benefits of using the merger & acquisition strategy for business growth include:

1. Quickly enter new markets. Entering a market may take many years. However, acquiring a company with a share in that market allows you to accomplish this goal relatively easily and quickly. 
2. Enter a marketplace with credibility. Gaining access to a new market is one thing, but gaining credibility as a new player is another matter. A proper acquisition or merger can easily get you that.
3. Diversify products/services. Expanding the products and services (merchandising, sampling & tasting) your company offers can lead to sustainability and revenue growth. In fact, larger companies will diversify as a way to prepare and protect themselves in the future. This trend is seen very often in the food industry. Take, for example, that Mars acquired Chappell Brothers years ago or Coca-Cola acquired Odwalla when Americans became more health-conscious.
4. Acquire the intellectual property. Intellectual property refers to non-physical assets such as copyrights, patents, and trademarks. Ideas can be turned into money-making services, products, and technology.
5. Acquire top talent. Mergers and acquisitions are a great way to get great talent. Top-down change management practices are essential to retain these strong employees, which, in turn, will protect the value of the deal.
6. Improve the conditions of sale. The assets that come with mergers and acquisitions can help your company operate at lower costs. A direct consequence of operating at lower costs is the ability to lower prices and, therefore, reduce competition. 

How to execute a merger & acquisition strategy?

The process to implement a defined growth goal using a merger & acquisition strategy is fairly straightforward and consists of five steps as depicted in the illustration below.

Step 1: Hunting for the target company

In order to make a lot of potential candidates, you need to perform a comprehensive assessment of the current market. You have to consider the economy, customers, competitors, as well as your current business and operations. Be sure to question each aspect of your evaluation to ensure your information is accurate and not idealized.

Step 2: Due diligence of potential target companies

Several factors must be considered when evaluating companies, such as the market value of corporate stocks, the financial health of the companies, threats, new opportunities that can arise along with market conditions, the benefits to be gained in terms of portfolio, market share, geographical coverage, synergies, and team strength, among others.

Step 3: Planning the M&A process

Once you have selected the best candidate based on the benefits to be obtained from the acquisition or merger, you need to define how to make the integration. This step is crucial and involves several aspects:

• Legal aspects, such as contracts, guarantees, sales agreements, and non-disclosure agreements.
• Financial considerations: Capital requirements, sources of capital, loan agreements where applicable, guarantees,  payment conditions, etc.
• Human resources issues: how the integration will be carried out, development of new teams, training, etc.
• Management involves scheduling, designating the merger team, and activity planning.

Step 4: Negotiate the consent of both companies

The ideal M&A is one that both companies agree on because both can benefit from the merger. To get to this point, the designees of both parties must go over the aspects related to the planning phase and reach a tentative agreement. If no agreement is reached and you are confident of your decision, another option is a hostile takeover. This process is more traumatic but if planned correctly can be executed without altering the end result.

Step 5: Get approval from the shareholders of both companies.

Once an agreement has been reached, there should be approval from the shareholders and promoters of both companies, as well as from management and other key people. Then the Merger & Acquisition deal should be finalized.

Conclusion

The Merge & acquisition strategy to grow a business in general, and particularly a distribution operation, has proven to be a successful strategy provided there are sufficient capital resources and a sound flight plan. Despite the challenges faced over the past 12 months due to COVID restrictions, acquisition activity within the distribution sector has remained strong. Larger distributors continue to merge with competitors and acquire smaller companies that provide complementary product lines to create a “one-stop-shop” for customers.

I hope this article has been helpful when considering growth strategies. I will continue to post information related to Warehouse Management, distribution practices and trends, and the general economy. If you are interested in this article or would like to learn more about Laceup Solutions, please sign up to stay updated on future articles.

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