Shifting Focus: A New Path to Growth and Recovery

Most senior executives have been faced with the realities of a declining revenue environment for the past two years.

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Flagship discussion topics in internal planning sessions have included areas such as finding cost reduction potential, scaling back capacity and squeezing the capital budget plan. Management’s focus on conserving cash and shoring up the balance sheet has been unrelenting.

Today, however, we have begun to see a shift in focus. A renewed sense of confidence has returned to the board room as a result of the recent rebound in corporate earnings, normalization in valuations and opening of capital markets. The manufacturing sector has seen eight straight months of expansion and is forecasted to see production grow at an annual rate of 5.4 percent in 2010 and 5.3 percent in 2011, according to Manufacturers Alliance/MAPI. The famed "G" word—Growth—is beginning to emerge again from the ashes of the global recession.

Senior executives now recognize the importance of shifting priorities to once again proactively drive growth in their businesses.  Initiatives in key areas such as new product development, new geographies and new customers will likely continue to be key drivers for organic growth in the industrial automation and control sector. However, many highly successful industrial companies have effectively deployed a proactive acquisition program to supplement these organic initiatives.

Being an acquirer

While every company will have its own unique needs, we have found that some of the most active and successful acquirers in the industrial sector share the following five common characteristics within their acquisition programs.

Successful acquisition programs start with buy-in from senior management. We have seen many top executives dedicate as much as one-third of their time to meeting with high-priority targets and participating in target reviews.

Defining goals through a well-considered mergers and acquisitions (M&A) strategy that outlines the scope of your target search is essential to an effective program. For every successful transaction, a typical acquirer usually has to evaluate dozens, if not hundreds, of potential targets.

Pipeline management must be organized with clear toll gates in order to properly track opportunities throughout the various stages of development. Frequent meetings among key decision makers keep targets moving through the pipeline.

Creating a standardized internal process for due diligence, valuation and approvals is the key to smooth transaction execution. These processes include standard value criteria set by senior management, and an in-house, well-designed diligence check list to create repeatable results.

Successful acquirers start the integration-planning process before a transaction is even closed. Following a detailed integration plan with clear daily roles and responsibilities for at least the first 90 days of ownership is not an uncommon approach. Consider appointing an integration manager knowledgeable in your company’s practices, policies and procedures to execute the plan.

Implementing a successful acquisition strategy is a difficult task and requires a process-oriented approach to each step; however, the benefits of having one in place may mean the difference between success and failure. For example, Honeywell’s Automation and Control Solutions Group successfully acquired RMG Group, a global leader in natural-gas measuring and control products, services and integrated solutions, for approximately $400 million in August of 2009. Honeywell was able to act quickly and decisively when this asset became available because of its long-standing M&A program.

The first quarter of 2010 has shown positive signs, and a more confident economy might be en route. According to a recent Reuters Business Roundtable Survey, 29 percent of U.S. Chief Executive Officers say they are planning to add more jobs in the next six months, and 47 percent say they plan to boost capital spending in the United States. A renewed confidence in the board room and manufacturing sector may mean a chance at future sustainable growth, including the identification, development and execution of acquisitions.

Jim Lavelle, jlavelle@hl.com, is a Managing Director in the Industrial Technologies practice, and Eugene Bazemore, ebazemore@hl.com, is Senior Vice President in the Industrial Technologies practice of Houlihan Lokey, an international investment bank (www.hl.com).

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