Build up: International External Growth Strategy
External Growth or Organic Growth?
The two growth strategies are very different. They each involve specificity of investments, governance and organizations. They Build up strategy and organic growth differ in planning and timing.
It is generally slower than growth by acquisition. Often easier to achieve than finding, acquiring and successfully integrating a target company. In principle, it is without radical change compared to the existing growth model. It requires a good understanding of processes, HR and legal matters.
The 2 modes of expansion are complementary. The Build up is well adapted.for the fast expansion on international markets.The Build up biggest challenge is growing and stimulating an existing alien organization.
Definition: Build up Strategy is External Growth
Build up or external growth is a model of development through successive acquisitions. It includes the merger operations of two companies (merger by exchange of shares, acquisition, equity investment, etc.). This is one of the most common models applied for international growth.
The Build up Strategy
The build up strategy consists of accelerating its growth, its presence and its market share through acquisitions. It is used as a lever to constitute a competitive advantage or an advantage of critical size. It allows you to grow your portfolio of assets, customers or skills more quickly than with organic growth. The build up is supported by an investment strategy. Investments are financed by equity, by debt, or by raising capital. For many growth companies, the build up is at the heart of the company’s development strategy. The Build up strategy is particularly suited to international development. The build up makes it possible to supplement the know-how and market knowledge with those of a target company.
In addition, the build up can also constitute a strategy for increasing the valuation of the company with a view to its subsequent sale.
Build up Strategy : Geographical and know how
The acquisition of another company makes it possible to increase its market share, know-how or geographic coverage. It is often synonymous with economies of scale and synergies of expertise.
Objectives of external growth
Acquisition and integration can accelerate the growth of a company internationally and create additional value. Whereas organic growth would require considerable time and investment.
3 Types of Build up and International Growth
Build up To conquer new markets, access new potential in target countries that are sometimes distant. It can be a supplier or service provider, a distributor or integrator. This choice of development is made within the framework of the establishment of a international strategy. This has defined target markets.
Competitive positioning towards a position of Leader.
By The acquisition of direct international competitors enables a gain in market share. In addition to the customer portfolio, and a specialized sales force, it allows the acquisition of leadership and local notoriety.
By acquiring indirect international competitors, for their know-how, their technology, their expertise for the benefit of its own solutions or existing customers.
In this phase the objective may be to dilute the competition.
Diversification by business acquisition in new businesses. It allows the addition of a business brick to complete its value proposition. It is also an important strategic turning point.
Build up: The benefits of external growth
Time to Market
Save time and energy compared to setting up and developing its own operations, or indirectly via an agent or distributor.
The Strategic Benefit
- Take a competitive advantage
- Gain a critical size
- Consolidation in the sector
- Acquire know-how or Technology
- Strengthen Branding
The Commercial Advantage
- Win new customers
- Win a market or territory
- Grow your turnover
- Increase market share
- It also means deploying a marketing strategy relating to its offers, prices and distribution channels.
The Organizational Benefit
- Attracting technical or commercial talents, top managers.
- Creating synergies, streamlining or pooling operations at all levels
Build up Strategy : Method in 10 steps
Definition of the specifications of the ideal target
Define criteria such as
- Revenue and size
- Economic business model
- Geographical presence
- Resources and assets
- Competitive position
- Customer portfolio
- Brand awareness and reputation
- Technology Solutions and know-how
- Ecosystem of service providers, suppliers and partners
- Organization, Sales Force and support functions
- Governance and Management
- Culture and scalable potential
Start to carry out an internal diagnosis which will list the drivers and the expected benefits. Review overall corporate Strategy and on what Business Model are aimed?
Check the risks of the acquisition operation on the current activities ? What transformation effort will be required ?
Target Screening and Identification
Targeting is mainly done by network approach. A funnel approach starting with a long list, narrows it down to a short list based on defined screening criteria.This is facilitated by regularly monitoring the target ecosystem (events, trade fairs, professional organizations). Investment banks and specialized M&A networks can also serve as intermediaries. It is necessary to count on a rate of refusal of the targets and thus to build a number of alternative options.
Refining and Strategic Fit
Once the short list is frozen, the canva approach is helpful to document the strategic fit. The review shall ensure that combined performance is greater than the sum of the parts.
Approaching the target
Is it preferable to make the first contacts indirectly to test the target’s receptivity to such an operation. This must be done over time while avoiding the creation of negative pressure.
After a round of introduction and evaluation calls, sharing intent, values, and common objectives, the project shall be formalized in writing.
At first we communicate an offer via a letter of intent (LOI) . This is non-binding and serves as the basis for the future share purchase agreement (SPA). The LAW defines the framework and limits of negotiation prior to audits. Due diligence will later validate the information provided by the assignor.
Audits and Due Diligence
It must cover all the components of the company, the economic and financial aspects, HR, Product Offering and technologies…
The sets of information are gathered in a Data Room or (VDR Virtual Data Room)
First of all, you have to clearly define the performance indicators that are relevant to your sector.
We can focus on certain aspects in a more specific way. We will also look at the rate and Customer cost of acquisition (CAC) .The customer attrition rate or Churn is also a very critical factor. The Net Promoter Score will provide information on scalability indices.
Different valuation methods
- The multiple method is the most common. It consists of observing and simulating a value based on the transfer prices of other companies in the sector or with comparable financial characteristics.
- The Goodwill Valuation Method reviews the value of assets and the liabilities. Debts are restated in order to obtain a corrected asset. It is based on the history of the company rather than on its dynamics and its potential. For high-growth companies and start-ups, the technique of evaluating future profitability is prefered. It is based on the forecast of cash flows after taxes as well as on the profitability objective.
In overall 7 methods can be used as described by Dealroom
As in any negotiation, it is necessary to properly frame the interest of each of the parties to achieve the Deal. Alongside the financial aspects, it is important to study all the indirect or hidden issues. What values are carried by each of the parties and what motivations. What additional value the buyer brings to the acquisition. It is then a question of “vocabulary” since we are entering into the framework of a contractual negotiation. The contribution of lawyers is essential here. The negotiation is finalized by the Closing which consists of a share purchase agreement (SPA). This often contains an “Earn-out” clause. This clause fixes an additional price which is adjusted to the future value. It adjusts to changes in the performance indicators of the acquired company (turnover, EBITDA, etc.). The term of “Earn-out” clauses is often 3 to 5 years.
It can be done on its own capital, by exchange of shares or by debt
2 mechanisms are commonly used:
- The accretive Acquisition
In this mechanism the acquirer buys a company whose valuation multiple is lower than its own, and values the consolidated whole on its own valuation multiple.
- Leverage Buy Out (LBO)
It consists of paying for an acquisition partly with debt and repaying it with future profits. The important thing is not to transform leverage into risk, through excessive recourse to debt.
This is often the underestimated part of an acquisition process. The set up of a right governance that will take into account cultural differences and a fair recognition of each party’s role and contributions.It is vital to anticipate and describe this phase from the start of the discussions. Indeed, many acquisitions fail for lack of agreement on these aspects of integration.
The M&A experts
Acquisition operations are sometimes complex. It is always recommended to seek the advice of Experts. The Alliance of Mergers and Acquisition Advisors brings them together, just like FUSACQ in France
The challenges of international external growth
An external growth phase will require the creation of new balances. Internationally, it means building a balance between the local and the corporate , between centralization and the autonomy of the subsidiaries. The challenge is to maintain agility while promoting consistency. The goal of efficiency is to think globally, and act locally. (“Think Global Act Local”).
Michelin Business Case
The example of Michelin Tyre’s is a good study case. They used M&A and the build up to expand their geographic coverage. They also use the external growth strategy to protect their patent assets, diversify into new businesses and services such as mobility technology.
Ipanovia and its experts in each of these countries advise you for your International development
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Ipanovia- International Development Consulting
Emmanuel Facovi – Co-founder & Managing Partner