Acquisitions
Some years ago, I had gone to seek advice from a wise and successful business person. My question to him was: how can Netcore grow faster? His one word answer was: Danaher. (Of course, he elaborated on it later.) I had not heard of Danaher till then. His key point was: to grow, you will need to think of acquisitions. You will not be able to build everything in-house. Danaher is one of the world’s best companies that has figured out how to make acquisitions work.
Here is a brief from Andrew Banovic: “Danaher’s business model is pretty simple, despite its continued success. It basically acquires and operates manufacturing companies. And not just one or two acquisitions each year. Over the last 30 years, Danaher has completed over 400 acquisitions. Not necessarily shiny brand-name companies, rapidly growing companies, or companies that need turning around. Simply companies in growing markets, without large competitors, where they can use their operating model to provide a competitive advantage. Because of their specific brand of value investing, they typically stay away from flashy markets and well known companies, basically because they don’t want to pay a premium for a name.”
This is from a strategy+business article in 2015 where Danaher’s executives speak about their approach to acquisitions:
Our approach to finding acquisition targets was 20 years in the making. It started when we decided we would not wait for Goldman Sachs to call us with their prospects. Instead, we did our own up-front research into prospective markets and started to build funnels of names of companies to buy and industries to enter.
Other companies try to make one perfect bet. That’s a risky way of letting senior executives with no experience sit on a lot of cash. Instead, we continue to explore many acquisitions and bring a significant number to fruition. When you acquire frequently enough, you learn what to do and what not to do. You develop skill at assessment and integration, and you learn to hold these assets over a longer time than might happen in private equity.
Our main criterion: Through this acquisition, can we ultimately become one of the market leaders in that industry? That typically requires that we pick up one of the stronger brands or assets within that industry, and that we generate at least as much value as, if not more value than, the current owners do.
We have a very disciplined M&A process. It starts with having a clear sense of what markets we find attractive. We look for large global markets with good growth profiles and generally low cyclicality. We also look for the ability to develop sustainable competitive advantage through a brand and intellectual property. We also look, obviously, for good profitability and low capital intensity. If we don’t like the market, we don’t bother looking at specific companies.
We do 12 to 14 deals a year and turn down 10 times that, so we’re doing 150 due diligences a year all over the world. We do extensive due diligence on each one. Our pre-acquisition investigations, especially on the finance side, are designed to dig up, expose, and share every bit of risk, making sure we all know what we’re getting ourselves into. If something looks scary, let’s make sure we sit around the table and figure it out or walk away. We try to be patient and not to get emotionally tied to any particular investment.
For proficorns, acquisitions can become a powerful lever of growth. Danaher is perhaps one of the best companies to learn from on how to do acquisitions right. Just one piece of advice: as you evaluate companies, look for a cultural fit also, especially with the founders of the target companies.
Will be continued soon.
