Companies often have a vision of how to maximize long-term shareholder value, but may not realize strategic acquisitions can play a key role in achieving that vision. The first step in developing an acquisition plan is to identify both your company's strengths and weaknesses.

Strengths are ways your company can enhance the performance of an acquired company or products. Your management team may be underchallenged; distribution channels underutilized; or you may have excess manufacturing capacity.

As an example, WD-40 is an American brand icon with strong customer and shareholder loyalty.

However, to achieve greater long-term shareholder value, the CEO and board of directors decided the company needed to move down a path of strategic diversification transitioning the company from a "brand fortress" to a "fortress of brands."

While strong in channels that included hardware, mass merchandisers, clubs, automotive and industrial, the company lacked a strong presence in grocery, drug and convenience store channels.  A good acquisition opportunity would bring needed strengths in one or more of these channels.

Then the company became aware tat another business was available with its own line of well-established, branded products.

It looked like an excellent fit. The combined products would enhance a growing family of brands.  Products were sold primarily in grocery stores, so the acquisitions would being needed strength in the grocery channel for the purchasing company.

Curb Your Enthusiasm
Like the name of a new show this season at HBO, it is important that round considerations be given to acquisition opportunities.  Management can become so excited about the opportunities that obvious problems are overlooked.  Boards of directors, outside advisors and professional investment bankers can look objectively at and advise management on opportunities.

The challenge was to make sure the deal would be a good fit today and into the future, strategically, financially and operationally for the purchaser.  And because the deal looked so strategically appealing, management needed to know all the potential downsides upfront.

Potential acquisitions should be considered at a variety of levels.  Financial models should be developed which evaluate the future impact on your company's revenue, product mix, gross profit margins, selling costs, overhead and more.

Be careful, though, to not overestimate the sales and cost synergies to be achieved — acquisition integration actually takes longer and costs more than you would predict. Again, curb your enthusiasm!

Look at other comparable transactions to gain a sense of the market value of the proposed acquisition. But, keep your value considerations in the "big picture" range. Clients need to be reminded that the wrong acquisition can't be fixed by a cheap price.  Conversely, if it's the right acquisition, the price is less important and will likely not hinder future success.

Try developing a financial model used to consider the acquisition's impact.  Considerations include product performance and pricing, channels of distribution and value-added velocity, and the impact on the company's financial performance.

In terms of the deal price, look at other sales transactions of similar products — in this case branded consumer household products.  If the price seems fair, successful negotiations can help with price and other improvements is the deal.

Strengthening Corporate Value
This case study is an excellent example of an acquisition model for several reasons, all driving back to building corporate value:

• It fit the long-term strategy of the purchaser to build shareholder value by diversifying the company's product mix.
   
• It strengthened the company's presence in the grocery channel, an identified weakness, which it wished to improve.
   
• It allowed the company to more fully utilize the strengths and capabilities of a management team that had been assembled with the vision of growing the company.
   
• It was a major step in transitioning the company from being viewed as a "brand fortress" with one product to a diversified "fortress of brands" with a family of consumer household products.

When an acquisition opportunity passes a detailed level of independent scrutiny and helps achieve this many strategic criteria, it is almost certain to enhance an already strong and sustainable business enterprise with an even brighter future.

Timothy G. Malott is a Partner of Shoreline Partners, LLC, a San Diego-based, middle market investment banking firm that handles sales of privately held companies with $10 to $200 million in revenue and acquisitions for public companies. Malott can be reached at 858/587-9800 or tmalott@shoreline.com.