GROWTH THROUGH ACQUISITION

Feedback from Experienced Entrepreneurs

A desire to grow more quickly, an aggressive approach in a very competitive market or just a market opportunity – there are numerous reasons why businesses engage in acquisitions. The result of a lengthy process, acquisitions are all about growth. But they also create a number of challenges to consider.

On February 20, 2018, we facilitated a round table discussion in Montreal between the leaders of six Quebec-based companies of different sizes and industries, all with one thing in common: they had each led successful acquisitions. Here are the main conclusions drawn from the event.

The Participants

Jean Soulière - CEO of BusPatrol

Jean Soulière bought the assets of a U.S.-based company whose technology can detect vehicles that drive past stopped school buses, thereby endangering the lives of children. His company now specializes in security camera solutions for school buses and has recently taken part in an Ontario pilot project to roll out the technology in Canada. Led by a team of seasoned professionals, BusPatrol aims to be the go-to platform for school bus safety.

Anthony Amiel - CEO of Distinctive

Anthony Amiel is the CEO of Distinctive, a North American leader in appliance wholesale and distribution. Amiel recently acquired the Corbeil Group in Quebec. Distinctive stands out for the innovation, performance and distinguished style of the products and services it offers customers in North America.

Mathieu Doyon – President of Réseau dentaire du Québec

Leveraging his experience with mergers of veterinary clinics in Quebec, Mathieu Doyon is now the president of Réseau dentaire du Québec. He has integrated firms with up to 20 employees into his network throughout the province and implemented a structure that enables centralized management of finances, data and employees to take advantage of economies of scale.

David Cape - CEO of Groupe Marcelle

Head of Canada's largest private family cosmetics company, David Cape is the CEO of Groupe Marcelle, well-known in Quebec for having acquired Lise Watier Cosmetics in 2016. The group operates in a highly competitive market, competing with global groups such as L'Oréal, Proctor & Gamble and Johnson & Johnson. It is also an industry where product innovation occurs almost daily.

Simon Baillargeon - Vice-President, Business and Agri-business Development of La Coop fédérée

As the largest agri-food enterprise in Quebec, La Coop fédérée is a cooperative of agricultural producers with 90,000 members and 18,000 employees. Since 1922, La Coop fédérée has provided agricultural producers with the goods and services necessary for their operations. As Vice-President, Business and Agri-business Development, Simon has been at the heart of several acquisitions aimed at the sustainability of agriculture in Quebec.

Daniel Caumartin - Vice-President, Business Development Americas, Information Technology and FFG of Bonduelle

Daniel Caumartin is Vice-President, Business Development Americas, Information Technology and FFG at Bonduelle, a French company experiencing rapid growth throughout America, from Quebec to Brazil. Bonduelle is the leader in canned, frozen and, more recently, fruit products with the recent acquisition of Del Monte in the United States.

The Moderator

Patrick Khouzam, Managing Director, Corporate Finance at MNP

Patrick is the Managing Director of MNP’s corporate finance team in Montreal. Patrick supports privately owned businesses in maximizing their value through sound strategic planning and the implementation of targeted initiatives. He also leads MNP’s food and beverage processing team for Quebec. He plays an active role in this sector, leveraging his extensive network of industry players.

Behind each acquisition, very diverse motivations.

Growth through acquisition often reflects a long-term business strategy. However, acquisitions are all motivated and influenced by an organization’s own market realities and their situation at the time. We asked our participants what motivated their acquisition projects.

Diversify to control production and acquire new market share

Food processor Bonduelle, whose mission is to ensure healthy living through plant-based food, recently announced their acquisition of Del Monte’s processed fruit and vegetable business in Canada. While the acquisition promises additional markets for Bonduelle’s canning facilities in Quebec and Ontario, it also elevates them to the top position in the fruit sector – representing more than two thirds of produce distribution, says Daniel Caumartin, Vice-President, Business Development, Information Technology and FFG Americas. Integrating Del Monte’s canned products into Boundelle’s operations therefore allows it to broaden its range of products while securing new market share.

Access to a network of distributors to consolidate growth

others, such as Simon Baillargeon, Vice-President, Business and Agri-business Development at La Coop it’s a question of improving competitiveness in providing goods and services to both the local and market.

"We just established a ‘partnership’ with Lufa Farms to benefit from their e-commerce platform expertise and allow our cooperatives to add to Lufa Farms’ range of products – thus increasing the co-op’s distribution network penetration,” says Baillargeon.

Another point stressed by Baillargeon: the acquisition of family businesses without succession in Quebec makes it possible "to secure market share or secure the places where one sells locally and maintain agricultural vitality throughout the province." Notably, La Coop fédérée acquired BMR in 2016 – allowing it to cover all Quebec regions through its network of hardware stores.

Seek production and organizational capacity to accelerate growth

David Cape, CEO of Groupe Marcelle, acquired Lise Watier Cosmetics two years ago. He says that in addition to acquiring a well-known local brand, Groupe Marcelle acquired Lise Watier to accelerate their growth trajectory in the cosmetics market.

With great demand and global reach, competition is stiff in the cosmetics industry. Largely dominated by conglomerates such as L'Oreal, Procter & Gamble or Johnson & Johnson, many small-to-medium enterprises like Groupe Marcelle use acquisitions as an accelerated growth strategy. More broadly, markets based on innovation-driven growth are better positioned to make acquisitions. They must move fast and therefore grow even faster.

Improve offerings to consumers to serve them better and to stand out

In order to consolidate their position in the long term, stand out from their competitors and boost a market which has not changed much over the past 30 years – companies like Distinctive have focused on acquisitions that allow them to rethink their business model, review their customer offerings and reinvent themselves in order to better evolve over the long term. In addition, the acquisition of Corbeil also allows Distinctive to benefit from a larger geographical deployment.

Develop business and increase market share

For BusPatrol, acquiring a Texas firm enabled them to finetune a technology and develop a new business model, thus creating the opportunity for a new market in Canada. By leveraging know-how and software expertise, the company ensured faster market penetration than would have been possible by developing its own product in-house.

Search for economies of scale

In line with the Canada-wide trend of consolidation and centralized structures, the Réseau Dentaire du Québec, a network of dental practices (clinics or individuals), has been paving the way for Quebec dental clinics. Managed by dentists for dentists, the company attempts to create economies of scale by providing centralized tools for management, technology (e.g. medical supplies) and data (by benchmarking customer and employee satisfaction). They also provide better knowledge of the market than a dentist could access alone.

KEY FACTS

According to a BDC study of Canadian entrepreneurs, in 2018, business acquisitions in Canada will drive investment projects.

Investments (in billions of dollars)

2017: 18.9

2018: 10.6

+79 %

Source: https://www.bdc.ca/en/about/sme_research/pages/investment-intentions-canadian-entrepreneurs-outlook-2018.aspx

The strategies and criteria used for acquisition targeting

Like the motivations that drive acquisitions, the strategies and criteria used for acquisition targeting depend on the market, the products and services concerned and the company’s situation at the time.

Criteria to target an acquisition

• Geography
• Distribution model
• Complementarity of services
• Relationships with market
• Streamlining costs
• Internal improvement tool

Geography and access to potential markets

A sector undergoing consolidation with a limited number of players can naturally push a company to focus on opportunities outside of Canada. This is the case of Groupe Marcelle. Several of our participants say that in such cases, they perform acquisition research well upstream and engage a deeper examination of their potential targets.

Relationship between the company and consumers and distribution model

How a company manages its sales, whether retail or online, has an impact on the acquisition decision. For David Cape of Groupe Marcelle, the acquisition of Lise Watier retailers was synergistic, in part, because Groupe Marcelle operated in the same way they do.

Relationships with market players

Daniel Caumartin of Bonduelle says the main players in his industry meet every two years. Because of high market demand and given the vast number of incumbents, they tend to be very open to hearing one another’s points of view. Caumartin mentions that during an acquisition his team will certainly look at the target company, its products, its financial health and its distribution network – but emphasizes that the brand is a major consideration. When Bonduelle acquired Del Monte, it positioned them directly in a new market segment, very different from where they had been previously.

Complementarity of data and services

Some companies, such as BusPatrol, indicate that the interest in an acquisition sometimes lies in the cultural synergies and complementarities of services between the two entities. For example, a carrier and a consumer goods company. Furthermore, a customer database can be the basis of the synergy between the two entities for whom the services and customer base will be complementary.

Potential for streamlining costs

Particularly with logistics, in particular, the transportation of goods by air freight or maritime channels, an acquisition can be of great interest. Especially when international sales or purchases are involved. David Cape also shared that a critical mass can also be a negotiating lever – no small matter when dealing with multinationals like L'Oréal.

Leverage as an internal improvement tool

Daniel Caumartin of Bonduelle stresses that before looking at external acquisition targets, they look at their suppliers, such as logistics companies, which could help to improve costs through partnership or acquisition. This practice is widespread in all sectors where a company exports product internationally.

The challenges encountered during acquisitions

The result of a lengthy process, acquisitions are all about growth. But they also introduce a number of challenges that are important to consider before moving forward.

Human capital: the cornerstone of the acquisition

A recurring challenge among all the testimonials is the one of employee integration. Particularly during the first year when first impressions are critical.

All the participants agreed: "The company’s strategy must be shared with the employees at the new entity," explains Mathieu Doyon, of Réseau dentaire du Québec. To compensate for the negative perceptions that an acquisition can generate among employees, "it is imperative to take the time to explain what is going to happen."

A human approach is important if the target is purchased for its know-how and not for its profitability, as was the case for BusPatrol. President and Chief Executive Officer, Jean Soulière, explains the company of 120 employees that he bought from a Texas-based group was struggling financially. "The employees knew the company was not doing well and often wondered if they were going to be paid from one week to the next."

As BusPatrol’s platform was not profitable at the time, involving those who had the know-how and software expertise was crucial for the future. "We got them involved by giving them the broad outlines of the direction to take and the key performance indicators that would be essential to detailing the progress made."

Change and transition management

All the participants agree that there is a lot of apprehension by employees and customers in the first year following an acquisition. Change management and the transition from one culture to another requires great care. Simon Baillargeon of La Coop fédérée even stresses that "it is important that the people know the new owners and their products well because the ultimate goal is for the new entity to continue to develop, for synergies to take place and to use that as a foundation for the company’s future development and growth."

Anthony Amiel of Distinctive says that in their case, the cultures of the two entities (Distinctive and Corbeil), including the relationship that each entity had with its customers, was very different. He adds that it took time for everyone to find their place and their bearings.

Vision and impacts beyond the 1st year

Upstream, acquisitions generate a lot of thinking, assessment and analysis – both financial and legal. However, all participants agree this is only the beginning. It’s not uncommon for the two entities to arrive with disparate visions, processes and cultures and for their respective integrations to differ in practice.

Everyone agrees that the impacts of an acquisition are numerous on the human, organizational or technological levels, but add that you must look beyond the first year. Often, companies focus on profitability, process integration and production tools during the twelve months following an acquisition. However, according to David Cape, the company "misses out on business opportunities by not planning two or three years ahead." In his case, it took well over a year for managers to familiarize themselves with the new products – products they did not know and that came from a completely different culture.

As mentioned by Daniel Caumartin, "it requires a long-term view and the teams need to be involved. They are the ones who are going to make the products evolve. Trusting them is essential; it is over the long term that synergies emerge. The team is the key in acquisitions."

Technology and IT infrastructure

Another point shared by all participants is the importance of technology and the company’s agility in leveraging technology. This plays a major role in the long-term success of an acquisition – especially with regard to consumer goods. At Distinctive, for example, IT infrastructure is an important consideration, particularly for financial consolidation. With its 31 points of sale, 16 of which are franchises (or, ultimately, 17 entities), Distinctive wants the ability to capitalize on an IT infrastructure, enabling smooth financial management and a competitive advantage during future acquisitions. Although this generally represents an important investment, consolidation of the IT infrastructure is always an essential consideration.

Key points to remember for a successful acquisition

The importance of communicating

• Have an internal and external communication plan
• Communicate its alignment with the company’s strategic planning
• Be transparent with the objectives of the acquisition
• Share the vision internally

The people: a critical asset for the acquisition

• It is the human resources that directly generate the synergies
• Work with all the teams
• Train the teams beyond the first year and ensure their support
• Push the decisions to the teams so that they can grow with the company
• Involve the employees in the new organization by appointing them to positions for example
• Communicate early successes observed after the acquisition

Maintain a long-term vision

• Stick to the message and communication
• Do not limit assessments to the first year
• Build long-term relationships that will favour everyone’s acceptance

Finally, be patient. Many leaders think that the acquisition is done after officially signing the agreement, when it’s really only the beginning!

We would like to extend our warmest thanks to the six leaders cited in this article for participating in our round table and for sharing their experiences and expertise with regard to their strategies for growth via successful acquisitions.

ABOUT MNP CORPORATE FINANCE

MNP Corporate Finance is a leader in providing transaction advisory services, including divestitures, financing, due diligence and acquisitions. With offices strategically located across Canada, we have the experience and expertise organizations need to take advantage of emerging opportunities in the national and global marketplace.