Strategies for challenging markets: Growing market share via acquisitions

Today's unprecedented market climate presents a daunting mixture—tight credit, negative growth, great uncertainty, and severe stock market volatility. With consumers weighed down by debt and with businesses seeking to cut expenditures, companies are finding it harder to grow organically.

For some companies, growing via acquisition may be an especially attractive option in this market environment. In many industries, the same forces that are restricting organic growth—the credit crunch and the recession—have also separated the strong from the weak. While companies with high cost structures or heavy debt loads are struggling, leaner and better capitalized companies are positioned to take the lead in growing through consolidation.

Since it has become nearly impossible to unlock value via an IPO, acquisition may be attractive to privately-held target companies, as well. The National Venture Capital Association reports that in the United States, 260 venture-backed companies were acquired in 2008—the first time that number has slipped below 300 in five years. Yet IPOs were even scarcer: only six venture-backed companies were brought to the public markets last year, the lowest number since 1977.

In Europe, the market also has been severely affected. The value of buyout deals fell 60% from a high of '‚¬184.9 billion in 2007 to '‚¬73 billion in 2008. According to a recent report by the Centre for Management Buy-out and Private Equity Research, the value of private equity deals in the fourth quarter of 2008 fell to levels not seen since the third quarter of 1995 (£989 million). We can expect a further downward trend for 2008.

At my firm, we are working closely with the management of a number of our portfolio companies on acquisition strategies. We have found that strong businesses can take advantage of lower multiples to eliminate competitors and to increase market share. If your company is considering growth through acquisition, we would offer six essential principles to consider.

#1: Be prepared to pay with cash
Acquistion financing has become a critical challenge, especially with bank debt now much harder to obtain. Publicly traded companies have lost one-third or more of their market capitalization, thereby reducing the value of stock as a currency for acquisition. Still, companies that have strong balance sheets and deep liquidity hold a major advantage: buyers with the cash to close promptly can distinguish themselves from the competition.

Bear in mind that you may not have to fund acquisitions solely from cash already on your balance sheet. If you are a profitable, growing company, you also may be able to tap private equity capital for your acquisition strategy.

#2: Stick with targets you know
This volatile, uncertain period is not the time to buy unfamiliar companies. However, it may be the best time to acquire businesses that you have been following for some time, and that are now available at more attractive valuations. Look for companies that have been affected by market dislocation or financial pressure, but that are otherwise sound. If there are problems, make sure they can be fixed, given the constraints on credit and cash flow in a slow-growth environment. Even at very low prices, some of your targets may be more trouble than they are worth.

#3: Understand counterparty risk
One key element of your due diligence is counterparty risk. Though the company itself may be sound and adequately capitalized, can the same be said of the individuals and businesses on which it depends? Are its customers facing credit constraints that may affect demand? Could problems along the supply chain impact the company's ability to make its sales targets?

#4: Set a clear path to return on investment
Before you close on an acquisition, ask yourself the following questions: How long should it take to recoup my investment and begin reaping positive returns? Is there any way to accelerate that payback? Are there risks that might make that payback period longer than expected? Being disciplined about acquisitions is always a smart strategy—one that is even more crucial during periods of economic uncertainty.

#5: Walk away if the price is too high
Prices for target companies have dropped, at least in theory, since the economic downturn began. Still, some shareholders, especially those in closely held businesses, may not be eager to sell at what they view as fire sale prices. If there is no pressing need for liquidity, they may prefer to wait for better times. As a buyer, you should expect seller resistance and build in time for longer negotiations. If the price is too high given current uncertainties, refuse to pay it.

#6: Take your time and choose carefully
In heated markets, buyers are often pressured to act quickly, rushing through due diligence and putting an offer forward before another acquirer can act. By contrast, the current market environment demands that buyers slow down and proceed cautiously. Make sure the acquisition really fits your strategy, take a hard look at pricing, and, most important, do not allow an acquisition to jeopardize your core business. A poorly chosen acquisition can distract your team and consume your capital at a time when you need most to focus.

By applying these guiding principles, you can focus your acquisition strategy in today's challenging markets. Remember that depressed acquisition multiples create opportunities for stronger companies to consolidate share and eliminate competitors. Although less plentiful than before, capital for financing acquisitions is still available for well-run companies.

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Managing Growth Companies in Uncertain Times

As highlighted during the final days of the 2008 presidential campaign, we are in the midst of a global economic downturn the likes of which many of us have never experienced. Current data continue to reflect a tighter credit environment, lower consumer confidence, less visibility, and greater uncertainty. Even the best-capitalized companies will find debt financing challenging and more expensive to secure. Those companies that do not require additional financing must adapt to a rapidly changing landscape—one in which their customers and suppliers may face capital constraints, cash flow problems, or counterparty risk on a scale never before contemplated.

However, today's daunting environment also can create opportunities for profitable, well-managed, conservatively capitalized companies. In 25 years of partnering with growing companies, our firm has determined that a number of strategies can increase the chances of success during—and following—an economic downturn. With that goal in mind, here are six strategies to consider:

View profits as your most reliable source of capital
In expansive credit cycles, growth financing for working capital or capital expenditures is easy to secure from various financing sources. In a more restrictive environment, however, the operating profit of your business may be your most reliable source of capital. Be sure to forecast realistic growth, and prepare contingency plans which assume no access to outside capital. Track cash flows monthly or weekly, looking for shifts in pricing, margins, accounts-receivable aging, or customers' ordering patterns.

Do not assume debt financing is unavailable
For many growth companies, debt financing is—and probably should remain—a critical and permanent part of the capital structure. As credit spreads widen to historical levels, debt is becoming more expensive. While debt may be more available to well-capitalized companies, it has not disappeared. If your business is fundamentally sound, you should be able to access debt financing, even in today's challenging credit environment.

Pay closer attention to your customers
Two years ago, companies invested primarily in technology to that could enhance revenue growth. Today, they are focusing on investments that generate cost savings with a quick payback and high return on investment. Your customers may be facing capital constraints that impact their ability to buy your products and services. Listen to your customers—and then adjust your marketing message and product positioning to changes in their budgets, strategic priorities, and buying behavior.

Evaluate your resources and capital allocations
A recession forces all businesses to justify every aspect of their investment strategy. Your executive team and board should reevaluate every component of your plan—from innovative technology to new products to geographic expansion. How you allocate scarce resources may determine your success or failure. Recognize that other companies are also evaluating their resource allocation and will likely triage their investment priorities. If your competitors are pulling back, for instance, in a particular product or geographic market, you may have an opportunity to expand at their expense. Market share becomes particularly fluid during times of economic turmoil, so look for opportunities to expand your company's footprint.

Take advantage of newly available talent
The natural response to market turmoil is freezing or even reducing your workforce, but that may be shortsighted. With entire businesses failing and others making layoffs, the supply of skilled, capable professionals will rise—and wages will decline in an efficient labor market. Often, you can hire people with greater talent at lower cost. During downturns, successful companies carefully consider their human capital needs, and look to selectively upgrade their teams.

Consider acquisitions to grow market share
With the structure of many markets fragile or fluid, well-positioned companies now have the opportunity to grow through consolidation. We are advising a number of companies on acquisition strategies, as depressed acquisition multiples create opportunities for stronger competitors to consolidate share and eliminate competitors. Although capital for financing acquisitions may be less plentiful than before, it is still available for well-run companies.

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As these six strategies demonstrate, an economic downturn of this magnitude is challenging for every enterprise. However, uncertain times also present opportunities for well-managed companies to capitalize on the dislocation in markets, in competitive behavior, and in the workforce. After the downturn runs its course, these companies can emerge as stronger competitors better-equipped to benefit from the ensuing period of economic recovery. Leadership is the key variable here.

Companies that are able to navigate volatile markets are typically steered by executive teams that share a common strategic view of their business and are like-minded in terms of the principles which guide their decision making. They do not hesitate to make tough choices on people, products, and markets, and they regularly seek the counsel of experienced board members, investors, and advisors.

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The Smart Way to Grow Internationally

Entrepreneurial growth companies are becoming increasingly international in scope, with operations, customers, and partners situated around the world. According to a survey done last year by The Economist Intelligence Unit, nearly one-third of midsize American companies seeking growth expect to do so by expanding geographically. Of these companies, more than half plan to expand beyond the U.S. borders to Asia, Europe, and Latin America.

Yet, while global markets offer attractive opportunities, entrepreneurs must develop an effective strategy before they tackle new geographies, either organically or by acquisition. Lloyd Shefsky, professor of entrepreneurship and co-director of Kellogg School of Management's Center for Family Enterprises at Northwestern University, agrees. "You can't be an exuberant, passionate entrepreneur without discipline. You have to balance the artistic with the sensibility of business. And that's not easy."

Throughout my own career, I have worked with dozens of companies as they address the issues surrounding international expansion. Here are seven critical steps to consider as you plan your company's international expansion.

#1: Decide if you are ready'¦and if the time is right
Without a doubt, companies today can take on the challenges of international expansion earlier than they did in previous decades. A common currency across Europe, the growing convergence of markets, and the Internet have made it easier than ever. Still, expansion can be a distraction for your management team, as it often siphons resources that are needed elsewhere. How do you know when your company is ready?

First, your company generally should have a sound, established business in one geographic market, and should be profitable enough to finance expansion. Beyond that, the right time really depends on the company. Businesses with limited home markets will look to expand before those with robust domestic markets.

For example, SafeBoot Holdings BV, a Netherlands-based computer security company, found that it needed to sell to the U.S. market almost immediately, simply because of the size of the security software market there. SafeBoot moved its chief executive officer to the United States early in its development and later recruited a board member with decades of experience in the national intelligence community who could help the company understand the U.S. government market. Also, SafeBoot identified a third-party partner in Japan, another large target market.

#2: Develop your top priorities'¦and stay focused on them
Begin by looking at global demand for your product or service: Where have sales been strong? Where are most of the buyers? Which markets are most competitive? Which ones offer the best terms? You also may need to consider factors that are unique to your company: Do you have a relationship with a key client or vendor in another market? Are any of your employees who come from another country fluent in its language or familiar with its local customs?

#3: Send your best people'¦and find locally based talent
Your people bring invaluable experience and in-depth understanding of your company, its culture, and its products and services. Locally based hires, by contrast, know the language, understand specific market conditions, and have contacts on the ground. The trick is to balance your local team with these two types of employees.

We worked with Luxembourg-based IGEFI Group Sàrl, for example, as it built a software development organization in Bangalore, India. The company initially sent one executive to set up an office and hire a local team. This executive was so successful that the three programmers he recruited still handle most of the day-to-day operations. While the original executive still travels back and forth to India, he now serves as a supervisor rather than as a hands-on manager.

#4: Seek out accounting advice'¦and legal expertise
Local accounting and legal professionals can help you navigate regulations and requirements. These experts also can help you set up your company, register with appropriate authorities, and comply with local regulations. Generally, you will not need in-house legal expertise, but you should designate someone within your organization to work with these professionals.

#5: Stay true to your vision'¦but adapt to local conditions
One of the real challenges of international growth is finding a balance between your company's culture and business model and the requirements of local markets. Companies that succeed internationally typically keep their overall strategy and goals constant, yet strategically adapt their tactics to local markets.

#6: Execute a global web-based strategy'¦but use local markets for sourcing
While the Internet makes it easier to reach customers in multiple countries, executing a global web-based strategy may be more complicated than you think. Even if sales are web based, for instance, companies often will need to source products in local markets and physically distribute them across borders.

#7: Be patient'¦give your strategy time to unfold
Companies often go through an extended period when they are spending money on international expansion and not seeing an immediate return. During this phase, you must ask the hard questions about your company's strategy: Have you chosen the right markets? Do you have the right people in place? Most important, do not panic. Growing globally is not an overnight process—building an established presence can take years of sustained effort.

For midsize companies, the international markets offer enormous growth opportunities, as well as significant challenges. You can easily become stretched too thin, underestimate the cost of international expansion, or overlook key differences between countries or regions. The key is to develop international strategies that balance the unique business strengths of your company with the specific requirements of local markets. That's the smart way to grow internationally.

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Live Twittering from Inc. 5000 Conference

Thanks to attendees @lizaK , @prospectMX , @ryanbuch, @emikubota and others (?) for your live twittering from the Inc. 5000 conference here in Washington DC.

How did I miss you guys?!

If you want to see the (small) stream of Tweets with live updates from the conference, go to search.twitter.com and plug in #inc500 or inc 5000.

I predict that attendees at next year's Inc. 5000 conference will be fully immersed in social media. This year was just the beginning...

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Seth Godin on Why Social Networking Is Important for Small Business

Seth Godin and Tom Peters got into a friendly shouting match yesterday under the bemused eye of moderator Susan Sobbott, president of AmEx OPEN and host of the AmEx OPEN Forum for small business.

The three were the mainstage attraction at the Inc. 5000 conference before lunch on Friday Sept. 19, 2008.

Susan posed some great questions about leadership, customer service, the loyalty of employees vs. customers, and controlling your brand.

The customer service question ("True or False? Technology has killed customer service") prompted the screaming. The Web makes for great customer service, Tom said, citing Amazon's recommendations feature and how easy it is to book a flight online.

It's not just about the technology, Seth said, citing the horrible experience of present day air travel. "Customer service is now for things that go wrong... your standards are way too low!"

"Where," Seth asked, "is the box where you check to pay more. I'll pay more and you'll be nice to me? Where is that"

Below Seth reprises an answer to a question from the audience: "Is social networking important for small business?"

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Tom Peters: Blogging Has Changed My Life

"If you're not blogging, you're an idiot," management uber-guruTom Peters told hundreds of attendees at the Inc. 5000 conference yesterday. "No single thing in the last 15 years has been more important to me professionally than blogging... It's changed my thinking, it's changed my outlook'¦ it's the best damn marketing tool and it's free."

Tom's blog is featured on his company home page.

In response to a question from moderator Susan Sobbott, president of AmEx OPEN ("True or False? You have control over your brand"), Tom said his perception of "brand" has changed since he started blogging in August 2004.

"The brand is now to a significant degree the quality of the conversation... and the conversation IS the brand," he said.

Fellow panelist Seth Godin agreed: "What matters is the humility that comes from writing (a blog), that forces you to describe why you did something. It doesn't matter if anyone is reading your blog. You're doing it for yourself."

Below Tom reprises how blogging has changed his life and his business.

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Contrarian Effect Co-author Elizabeth Marshall on Offering Value Instead of Selling

While Michael Port was busy on stage this afternoon at the Inc. 5000 conference, his co-author Elizabeth Marshall took a few minutes to do a Q & A with me. Michael and Liz have just published The Contrarian Effect.

Q: Is it true that you and Michael considered titling the book The Costanza Effect? I'm a huge Seinfeld fan so that might have worked for me.

A: Yes, that's right. Michael initially thought of The Constanza Effect after seeing a Seinfeld rerun called "The Opposite." George Costanza (Jason Alexander) laments being kind of a loser - an unemployed shmuck who can't get a date and who lives with his parents.

During the episode, he comes to the conclusion that the reason he's had failure after failure is because he's been doing the wrong thing, so he immediately vows to do the exact opposite. As a result, he not only gets the girl, but experiences great success.

While the Seinfeld episode pokes fun at George's logic, we really do want anyone who sells for a living to take what they've been told to do - or think they should do - and try doing the opposite instead.

As for the title, although we loved The Constanza Effect, we felt that readers who didn't love Seinfeld wouldn't get it or appreciate it.

Q: I hate getting cold calls so I love the premise of the book. Give us your top 3 specific examples of contrarian selling that works.

A: One specific reason that cold calling and many of the other typical sales tactics don't work is that they are out of sync with today's customers. Many of the typical tactics had their beginnings around 1887, which is evidenced by the NCR Primer, a training and sales manual for the salesmen of National Cash Register.

In contrast today's customer can not only screen out unwanted calls, emails or junk mail, but they know that they control the buying process.

So three examples:

1. Business software company Softrax more than doubled its sales (from $12 million to $27 million) after they implemented a free, monthly "Always Have Something To Invite People To" offer - an Executive Webcast Series. Instead of calling and asking for the sale, Softrax positioned itself as a trusted advisor.

2. Apple offers value; they don't sell. Their sales associates create a low-pressure, fun and stimulating environment - a place to spend Sunday afternoon - that invites customers to buy when they are ready. As a result, Apple doesn't have to ask for the sale.

3. By taking steps to understand their customer's interests and preferences, Amazon makes relevant and customized offers. Every time you log in they serve up recommendations and suggestions in sync with previous purchases. We know we all succumb to this.

Ed. note: As Tom Peters put it earlier today in a discussion about online customer service, "To my great irritation, I like five out of six of (Amazon's) offers... and I buy them all!"

Q: Any advice for Inc. 5000 companies who want to keep growing even as Wall Street and the economy are in a nosedive?

A: Absolutely! Adopt the Contrarian Effect. Regardless of the stock prices or the economic outlook, human nature stays the same. Which means that people (and companies) will buy to express their values and priorities.

Inc. 5000 companies have an incredible opportunity to tap into what potential clients are looking for and to build trust and credibility with them over time.

Q: So it's really about value and trust, not about selling.

A. Yup, you got it.

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Dell VP Bob Pearson Listens to 10,000 Online Conversations Everyday

"We've finished chapter 1 and we're just starting," Dell's VP Bob Pearson told me, noting that 1.46 billion people are online today but only 1.6 million of them visit Dell's site daily.

VP BP, as he's called, is in charge of listening to the 10,000 conversations about Dell that are taking place every day online. With his team of 42, Dell enters about 100 of those conversations each day, Bob said. They do it via blogs as well as the newly-popular Twitter. Dell has 65 official Twitterers, including digital media team member@RichardatDELL, who has 1,779 followers.

I'm sitting in Bob's session at the Inc. 5000 conference and he's just outlined 10 recommendations for small business.

Dell's launches a new Facebook community, Social Media for Small Business

Seems Bob is everywhere today. Dell announced a few hours ago that it has launched a Facebook community called Social Media for Small Business. You'll see Bob featured in the video on the home page. This does look very cool. Lots to explore including a screencast intro to social media tools like Netvibes (Bob's favorite, he told us), a discussion board, best practices... and (why not) deals on Dell products for SMB.

Listening to Bob now explain the new Facebook community and to Q & A from the audience. Will post Q & A video later.

Update: Below Bob talks about how tapping into Facebook's community is like entering a new country.

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