How Middle Market Companies Can Approach Buy-Side M&As Confidently and Strategically

How Middle Market Companies Can Approach Buy-Side M&As Confidently and Strategically


With expectations that the economy will remain strong, many middle market companies increasingly view a merger or acquisition as a potential vehicle for growth.

A recent survey from the National Center for the Middle Market found that 60 percent of respondents indicated M&A plays an important role in their overall strategy.

However, middle market executives tend to have less experience and fewer resources than larger companies that make frequent acquisitions.

“Large multi-billion dollar companies have entire teams dedicated to M&A transactions, but most middle market companies don’t have the same resources,” says Fifth Third Securities Investment Banking Managing Director and co-head of Buyside M&A Advisory Jim Parrino. “The responsibility might fall to your CFO or VP of Business Development, who have never done an M&A deal before—or have a million other things on their plate.”

So, for example, many companies will assume a reactionary approach to buy-side M&As by default. You may invest an enormous amount of time and energy in bidding on an acquisition while aggressively competing with 200 to 300 other potential buyers -- when the deal ultimately doesn’t pan out, it’s back to business as usual.

A more proactive and strategic approach can help remove many of the common roadblocks to the deal-making process, including dead-end bids, redundant processes and missed opportunities.

The following steps can help you target the deals that have good-fit potential for your company’s specific objectives.

Find the “why”

Long before middle market companies begin hunting for potential deals, Fifth Third Securities Investment Banking Managing Director Michael Ho encourages clients to fully understand the motivation for pursuing growth via a merger or acquisition in the first place.

In other words, is it necessary to look outside your base business to sustain the business or achieve growth?

Acquiring a competitor might feel like the most natural and direct route. For many companies, staying close to the core business is also the most comfortable.

However, it could be time to look elsewhere.

“An honest and detailed self-assessment may suggest that doubling down on the current core business is not a long-term sustainable strategy,” Ho says.

Which is to say, in order to achieve your growth objectives, you may need to look to an adjacent market or even beyond. Will acquiring more of the same truly give you a competitive edge? Or will expanding into new products, services or even industries give you a competitive advantage?

Grocery store chain Albertsons recently acquired a meal delivery kit company, Plated, rather than another grocery store chain. Yes, the latter might have helped Albertsons expand their footprint. But the former could bring more customers into existing stores. Albertsons now sells Plated’s ready-to-cook meals, offering time-crunched millennials more of a reason to shop there, setting the company up for strategic and competitive growth by appealing to a new generation of shoppers.

Develop an acquisition strategy based on strengths and weaknesses

If you’ve identified an M&A as an important tool to meet your growth objectives, the next step is to develop a statement of strategic intent based on an assessment of your strengths and weaknesses.

This requires thinking about the past, present and future state of your company. Your differentiators likely have evolved over time, especially if you operate in an old economy industry.

As an example, Michael Ho tells a story about a company with a historically dominant market share that processes specialty metal. However, in recent years, the applications for the metal have shrunk due to the development of new technologies and new materials. Furthermore, increased production from China have reduced profit margins and increased volatility. As a publicly traded company, management is finding it increasingly challenging to meet the capital market’s growth and profitability expectations from solely organic growth opportunities. For this company to survive the next 10 years—and beyond—it needs to address that challenge. This is the perfect opportunity to explore adjacencies to achieve growth.

Recent acquisitions by Amazon and Wal-Mart provide an enlightening case study.

Amazon already dominates the e-commerce space. To build their brick and mortar presence, the online retailer acquired grocery store chain Whole Foods.

Wal-Mart, on the other hand, chose to go in a completely different direction. As one of the largest retail companies in the world, Wal-Mart already had strong brick and mortar presence. They needed to build their competencies in online retail. Enter the acquisition of the fast-growing e-commerce company, Jet.com.

In essence, Amazon and Wal-Mart used the same acquisition strategy to achieve growth: They went all-in on strengthening their weaknesses.

Create your scorecard

Only after an honest exploration of core competencies—and gaps—should middle market companies pursue acquisition opportunities. It may take months to get to this point, but ultimately it saves time in the end.

Once you delineate specific growth objectives, you have a disciplined process, or scorecard of sorts, for whenever deals or opportunities arise. You possess an understanding of what constitutes a good fit—and what justifies a hard pass.

“By switching from reactive to proactive, you have a roadmap to evaluate every potential acquisition,” explains Parrino. “You can very quickly triage opportunities, wasting less time.”

Your company also has a higher chance of targeting potential acquisitions not actively for sale. If you do enter a traditional auction or bid process, you’ve already done the strategic heavy lifting—and likely have already developed a relationship with the target.

“You’ll be in a much better position to complete a successful transaction if your fundamental building block is strategy,” Parrino says. “This foundation points you to the target industry sectors that align with your strategic intent and help you build your competencies.”

The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever.