Grow Or Exit – There’s No In Between

Industry Rationalisation

Whether you’re buying or selling, industry rationalisation will not be leaving us any time soon. Only last year the number of purchased businesses reached a record high – and this is expected to continue in 2008 and 2009. Similarly, the number of companies placed into administration and receivership is (for various reasons) also at record levels. This too is expected to continue. In short, industry rationalisation is occurring everywhere across the supply chain, including retailing, distribution, supply and manufacturing. The nature of these transactions comes under four broad categories, generally described as follows:

Public to Public Where a public company purchases another public company, such as with Wesfarmers’ acquisition of the Coles Group. Public to Private Where a public company purchases a business that is privately or family owned, such as the Crane Group’s purchase of Kingston Bridge Engineering. Private to Private, such as Dahlsens’ purchase of Cairns Hardware. Private to Public, such as the acquisition of Repco by private equity firm CCMP Capital Asia.

The reasons for rationalisation are fairly consistent although a significant proportion come under the auspices of an ‘industry roll up’. This is where a company – regardless of its size – seeks to grow over and above any existing organic growth opportunities, since improvements in profitability are limited without revenue growth.

The Call To Action

With rationalisation a constant force in today’s market, anyone considering acquiring or divesting of a business should undertake the following crucial steps.

 

  • Highlight the most appropriate markets, regions and channels in which to acquire or divest of a business, along with the most appropriate marketing process. An important ingredient in strategic planning is to carry out a full assessment or health check of the business wanting to make an acquisition. This ensures that the owners and directors have a full appreciation of their ability to make an acquisition, including affordability, impact on customers, branding, organisation structure and ease of integration.

 

 

  • Evaluate the business for sale, the likely sale price and its supporting rationale. Research and identify likely buyers or sellers. With divestments, develop a dynamic information memorandum, an appropriate sales plan and related activities, a timeline, and accountabilities. Then assess the marketing, financial and operational dynamics associated with an acquisition.
  • Once a short list of likely targets has been prepared an assessment needs to be made of the following: prospective gains in market share, sales and gross margin increases, the infrastructure required in terms of people skills and logistics, and of course the funding of the acquisition. This will affect the method and funding requirements to complete the transaction.
  • Finally, ensure you conduct due diligence and seek taxation advice. Look into financial and estate planning and examine branding and positioning strategies. Organisational and cultural change will be necessary, as will re-structuringMoore Stephens’ key executives are Geoff Dart, Associate Director of Management Consulting; Marco Carlei, Deputy Managing Director and Director of Business Services; and Grant Sincock, Director of Audit and Assurance. They have been leading transaction assignments predominantly in the building, hardware and construction industry. E-mail Geoff on gdart@nullmoorestephens.com.au or call (03) 9614 4444 for more information.