So what can be done to mitigate this big problem?
There are a couple of ways that you can grow the business. One way is the organic route and the other is the inorganic route.
Let’s discuss the organic route first. Using this strategy, you can increase sales by adding more sales people, explore channel marketing and create reseller channels. The good news about organic growth is that there are lots of talented sales people available due to the Great US Recession.
But there is a problem. Tier 2 companies especially are struggling to add new businesses as their customers are consolidating the number of vendors that they deal with. Recently I was talking to a manager of large American logistics company and he mentioned that they have reduced their suppliers from 9 to 3. This scenario is happening across all industries.
Now using the inorganic growth strategy, you can look for companies with whom you can merge or acquire. In most sectors, if you are not among the top 10 players in the space, you can’t reach a critical mass in your industry and therefore it is harder to grow today.
If you have a strong balance sheet, banks are willing to work with you to finance an acquisition. The financial crisis has created big opportunities and valuations have become reasonable again, from the frothy levels of the past. We cannot drive looking at the rearview mirror, so our advice to clients is to seek strategic acquisitions.
One of our clients is in the medical transcription and billing business and is pursuing a roll up strategy. The medical transcription industry is fragmented with about a thousand companies having less than $1 million in revenue. By combining companies in similar business one can achieve operational efficiency. Also larger revenues command a better valuation in the market. Another example is making acquisitions for geographical diversification.
One of our other clients who is an Indian automobile components manufacturer is looking to make overseas acquisitions, and we are sourcing targets – both profitable and distressed companies – in automobile parts manufacturing. This enables our client company to access new markets and new suppliers for raw materials. Other reasons a company might be interested in mergers and acquisitions are cross-selling, cost savings, product diversification and customer-base expansion.
What are the trends? Acquisitions have been strong this year and we expect this trend to continue for several more years. Recent examples are Tata acquiring LandRover and Abbott acquiring Piramal Healthcare. This is not just a blip on the radar but a strong secular macro trend. Due to an increase in globalization, there is a strong interest from mid-sized US firms to look at India and China as new markets.
Fortune 500 companies have already made their entry into these markets. Now it’s time for small to middle market firms to follow the leaders. There is increased activity in all sectors, especially in Information Technology, BPO/KPO, Power, Agriculture, Retail, Telecom, Healthcare, Pharmaceutical and Commodities. Since commodity prices are close to all-time highs we are witnessing a heightened interest in M&A activity in mining and food industries.
To sum up the trend, Harish HV, partner at Grant Thornton India says, “We have seen a significant level of activity in mergers and acquisitions and private equity investments in 2010 and we believe that 2011 will be an even more exciting year in these two business growth strategies. “
Here are some tips for companies looking into inorganic expansion –
- Don’t ape your competitor’s strategy but create your own and execute it flawlessly. This can be done by using in-house corporate planning and a development team or hiring a business advisory firm to assist you.
- If you are considering cross border acquisitions, you need to focus on cultural factors, tax, legal and other regulatory issues.
- Responsiveness is very important when an Indian company is trying to acquire a US based company. There should be a senior executive dedicated to the transaction, who will be responsible for internal coordination and prompt execution of tasks.
- American companies trying to enter the Indian market should be willing to make long term commitments.
- Product companies fare better than service companies entering India.
In the next issue, I will be writing about the best practices for buying a business.
Suresh Arya is Director at Simanor LLC- A New York based business advisory firm specializing in mergers and acquisitions, joint ventures and market-entry strategies for domestic and overseas companies in the lower-middle market.