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Growth through acquisition

THERE are many firms currently who have experienced challenging trading environments in the past 12 to 18 months. These conditions, combined with a general level of uncertainty in capital markets over this period, has positioned stronger firms with healthy balance sheets very well for growth.

Strong firms should be looking for growth-by-acquisition opportunities right now. Consolidation among second and third-tier players during downturns is inevitable and can rob the stronger players of opportunities to consolidate their market position.

If your balance sheet is in good shape, you have a strong relationship with your debt and equity providers, and you have developed a clear growth strategy, then you should immediately seek out acquisition opportunities. These opportunities simply will not be available to weaker industry participants, who may seek to merge in order to protect their market position as trading conditions improve

If market conditions pick up over the next six to 12 months the key buying opportunities may pass you by.

Hence, while reflecting over the Christmas break, add the option of acquisition to your corporate strategy considerations.

If this is a new topic for you, here is a selection of very basic approaches to utilise in thinking through potential opportunities.

Geographic expansion: Simply taking your existing business model, applying the same core skills that you have utilised to be successful in this market and applying them elsewhere. You will need to co-ordinate the rebadging exercise, be prepared to hire staff in the new location and re-locate a small selection of existing management, not necessarily for the long term. This strategy is sound, less risky than many acquisition strategies and certainly saleable to capital providers.

Value chain expansion: Moving up or down your industry value chain so as to control additional industry segment activity, generate additional volume and, most importantly, margin. You will need a good understanding of your industry, most likely have very good relationships with key suppliers of customer groups, and have a brandname that should be extendable upstream or downstream. There are plenty of traps in this strategy, most of which centre around getting into a very different business, albeit in the same industry. However, for strong players, it can lead to a long-term dominant industry position.

Consolidation: On the basis the industry segment growth may be slowing for a period, swallowing up smaller, often weaker, competitors can gain volume and scale and often offer cost savings. A strong core business model, transferable skills and a strong management team will be the key with this strategy because some firms can spread themselves too thinly through this strategy execution. Organic growth is tough to achieve in slow growth environments, so don’t be afraid to consider a more aggressive approach if the conditions appear favourable and capital providers favour your strategy. The reward could very well be a strong long-term leadership position in your industry.

The writer can be contacted at anthony.wooles@trudo.com.au or through the office at Business News.

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