By Bill Vinck, Excendio Advisors
Follow the Conductor Closely!
In the last 40 years, Brad Jacobs has done almost 500 deals while building several billion-dollar businesses. He built United Rentals, an industrial equipment rental company and United Waste Systems, a garbage collection company, to name a few. You might say that he was a conductor of an M&A symphony orchestra.
A review of his approach is instructive. One might call it a master class in M&A. In this article, we’ll review some of the major lessons that can be gleaned from this background.
Be painfully clear on the strategic rationale for the acquisition.
Example: United Waste
Strategic Rationale: There was significant fragmentation in the waste collection market-place. Such fragmentation presents an opportunity for the focused acquirer in terms of target density and scale. The key was to identify an approach that would allow the nimble acquirer to build commanding market share.
Approach: Avoid major markets. Identify tertiary markets and begin the campaign with landfill acquisitions in those areas.
United Waste was a roll-up. The strategy was to roll-up collection companies in these tertiary markets. But rather than immediately approaching collection companies, they focused on identifying and buying landfill capacity. Recognizing that scale is a critical variable in the waste business, they focused on geographic areas where they could quickly achieve major market share.
Once that landfill footprint was established, focus changed to reviewing the collection companies that used that landfill and begin the acquisition process from a position of relative market strength.
Result: The strategy worked. They experienced a 55% CAGR on both earnings and stock price.
Example: United Rentals
Strategic Rationale: United Rentals was designed as a roll-up first and a roll-out second based on the understanding that the ROIC on the roll-out is greater but unattainable without a successful roll-up.
Approach: The roll-up was the acquisition of about 250 industrial equipment rental companies. In some weeks, as many as 3 acquisitions were competed. The roll-up was a financial success, but UR realized that what they meant to acquire and did acquire was a growable footprint. Those 250 companies were that footprint. Once acquired and integrated, the roll-out from the new acquisitions began and it was more successful on a ROIC basis than the original roll-up.
Result: United Rentals in this period outperformed the S&P 500 by a factor of 2.
M&A is a team sport and multiple team activities must be coordinated.
The major cogs in the M&A machine included location and candidate company reviews, contract negotiation, business process planning and integration, cultural integration, technology integration, back-office integration, and marketing and sales alignment. Each of these “cogs” is supported by a dedicated team and by a defined process.
It was clearly understood that early movement to common systems was central to success.
Each team must move quickly and cleanly as the other teams are counting on them. There’s no room for a broken “cog” in this machine.
A successful acquisition requires a deal business model (DBM).
The DBM is a set of answers to a series of internal and external questions such as:
What impact will this acquisition have on:
- Improving the service we provide for customers?
- Improving the cost structure of our firm and providing the basis for improved margins?
- Improving our ability to offer more product capabilities?
The details of the DBM will vary from transaction to transaction. The key, however, is that these answers are developed in depth and avoid the mind-numbing cliches typically heard in the justification of an acquisition. “Synergy” is a perennial favorite in this arena. Those who understand DBM and take it seriously further understand that detailed, data driven answers to the above questions will define success or failure. They become the principles by which the entire operation is managed.
The above approach was successful over hundreds of acquisitions completed over many years. The lessons provided, however, are useful to anyone active in the M&A world.