By Maurie Cashman
An acquisition search is a process undertaken by many business buyers to find businesses meeting their unique criteria, whether or not those businesses have indicated a willingness to sell. Two weeks ago I wrote a comment titled Berkshire Hathaway â€“ Five Growth Strategies in which we discussed the methodologies in which Warren Buffett and Charlie Munger have traditionally grown their business in the past.
I also attached an article called Buffett: Prepare yourself for the painful cost-cutting across corporate America which discusses an alternative method for growth that Berkshire has employed by partnering with 3G Capital, who has a reputation for dramatic cost-cutting and forcing productivity improvements in the companies they acquire.
Buffett states â€œTheir method, at which they have been extraordinarily successful, is to buy companies that offer an opportunity for eliminating many unnecessary costs and then â€” very promptly â€” to make the moves that will get the job done,â€ Buffett wrote of the leaders at 3G Capital. â€œTheir actions significantly boost productivity, the all-important factor in Americaâ€™s economic growth over the past 240 years.â€
While this seems like a contradiction to Berkshireâ€™s style, I have a theory on what is going on behind the scenes here. I believe this strategy can also work for other opportunistic business acquirers. This theory rests on four basic premises:
- Berkshire has more money than it can efficiently deploy;
- Berkshire realizes it does not have the resources to step out of their comfort zone on their own for certain acquisitions;
- Berkshire does not want to damage its brand name by having to employ certain tactics required in turning around companies;
- Berkshire sees tremendous opportunity to wholly acquire these companies once they have been turned around.
More Money Than It Can Efficiently Deploy
I attended Berkshire Hathawayâ€™s annual two years ago in Omaha. One of the criticisms that was coming from shareholder questions was the unwillingness of Buffett to pay out either higher dividends or a one-time special dividend, due to the mountain of cash that Berkshire was sitting on. Buffettâ€™s answer was consistently that he felt that there were better opportunities for shareholders if they invested that money at opportune times to acquire more great companies. It is hard to argue with their historical track record, although the larger they get the more difficult it may be to find these opportunities.
My hypothesis is that Berkshire is partnering with 3G to find opportunities that do not fit their traditional investment criteria, so that they can deploy that cash in ways that they wouldnâ€™t have under their traditional methodology.
â€œMissing the right opportunity is half the fear weâ€™ll experience and the other is picking the wrong opportunity.” — Jon Acuff
It takes tremendous resources to find a good company to purchase. Often you are looking for companies that are not â€œfor saleâ€. These resources involve having the talent to sort through all of the potential businesses that may be fits for an acquisition, making contacts and developing very high-trust relationships with these ownerships, negotiating transaction structures, performing due diligence and closing and last, but not least by any means, integrating that business into an existing culture.
Berkshireâ€™s traditional style has been to acquire already great companies and to quickly integrate them into their platforms. They get hundreds of calls each day from companies that would like to be acquired. However, the number of these companies that meet Berkshires criteria are very small.
Thatâ€™s where 3G comes in. They can sort through the companies that donâ€™t meet the criteria and find the ones that could, with a little work.
Damage to Brand Name
The very last thing that Berkshire Hathaway wants to do is to make an acquisition that could damage their brand name. If you need evidence of this, just watch the NCAA tournament this month and count the number of GEICO ads you see and estimate how much they are pouring into building that brand. A mistake could be devastating to a brand that is worth billions.
How do you avoid this? By working through an intermediary like 3G, who can approach and acquire companies that have some rough edges and then let them do the dirty work of firing employees, closing plants and changing strategies and cultures. Berkshire can simply provide debt or equity capital and stay out of the rough and tumble of company turnarounds.
I would bet good money that the majority of the companies acquired by 3G become Berkshire Hathaway holdings within five years. Since Berkshire is having trouble deploying its cash flow fast enough through its traditional methodology, it must find other ways to find opportunities. Once these companies are turned around, Berkshire will be on the inside and ready to convert debt to equity or to infuse additional equity into the business.
You can use many of these principals to grow your business. The questions that you must answer if you want to grow via acquisition are:
Do I have the resources to find a good acquisition?
How do I know if this is a good fit for my business?
What is my exit strategy if the acquisition doesnâ€™t work the way I thought it would?
Does a Targeted Acquisition Search answer some of these questions for you?
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