The opportunity to create cost synergies is the driving force behind many business deals. But the actual savings accrued in these transactions often fail to meet expectations, says Dan E. Silberberg.
“There is this feeling like, ‘We’ll buy this company, merge them together and we'll get cost savings because we won't need two legal departments, two accounting departments, two HR departments,’” Silberberg says. “It will be this enormous cost savings play. But if markets are shrinking, which is what happened in the Kraft/Heinz deal, sometimes that shrinkage really won't make up for the cost savings that you thought you were going to get.”
Silberberg, founder and CEO at DIGINTEL Inc., has more than 45 years of experience in consumer products, particularly in strategy, innovative business models and exponential top-line growth.
We caught up with Silberberg to tap into his expertise on M&A strategy and explore the right and wrong reasons to make a deal.
Develop an M&A thesis
No matter what company you're currently at or what industry you currently participate in, the bottom line is: What's the thesis behind what you want to do? If you're a company, are you looking to add a non-competitive product? Are you looking to do a rollup? Are you looking to dominate a particular category, so you're going to buy a competitive product, but still within your category.
Back in the ’70s or ’80s, Procter & Gamble bought Vidal Sassoon and the whole idea was they were going to enhance their hair care position in the market. But as it turned out, they had launched Pantene and what they really wanted was to not have them as a competitor. They ended up buying it just to put it out of business. That created a lawsuit.
I tend to look for big markets. Where is there fast upside growth? So I'm not looking to buy in mature markets or in markets growing at one or two percent because in slow-growth markets, you have to be a genius in everything for it to come out. In a fast-growth market where there are lots of new things happening and you're growing much faster than GDP, a lot of boats will rise in that marketplace.
What are the goals you have and where would you like to put your money? I'm looking at things like health care, financial services and technology because I think that's the future.
Plot your exit strategy
If you’re buying a company, what is your exit and what are you architecting to? For example, we actually built a beverage company from scratch. We built it from day one with the idea that it would go to Coke or Pepsi or one of the really big beverage guys. So the way we put our supply chain together, the way we put our cost and business model together, the way we architected our go-to-market and marketing strategy, all of those things were built day one as if we were already a division of those companies.
If you're buying something with the idea that ultimately you're going to be selling it down the road, what is that architecture? Even if you're not going to sell it, what is the architecture that you're going to have? Is it going to be, for example, you have a business call center and now you're buying a business that is going to require independent sales reps? Those are two very different business models. They require different skills.
It’s not just looking at the top line revenue. What's the architecture that really is going to make that whole thing work? What's that blueprint look like? The more you can get that identified, the more you're able not to be so emotional about falling in love with a potential transaction. That's sort of what Warren Buffett does. He says, ‘We have our parameters here and if it doesn't hit our parameters, we don't get upset. We just walk away.’ To be successful, the more you can define that and lay that out and have that memorialized, it becomes a very good north star to evaluate pretty quickly and not get bogged down in just thinking, ‘Oh, it'd be really cool to own these people.’