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What Companies Can Learn About the Amazon/Whole Foods Deal

June 26, 2017

 

The grocery industry has seen its share of mergers over the past few years, though they’ve been largely between competitors. Albertsons buying Safeway, Kroger acquiring Roundy’s and the owners of Giant, Stop & Shop and Food Lion joining up are just a few examples. 

 

This recent history makes the $13.4 billion purchase of Whole Foods by Amazon that much more exciting. Contrary to many pundits, this one made the most sense to me because of the incremental value it offers both companies.

 

There’s a reason why the organic food store chain will sell at the top end of the industry’s average valuation. Amazon sees this in a much different light than a Stater Brothers would have. The reality is when a competitor acquires you, it’s typically not a strategic purchase. They’re only increasing market share. Amazon is undoubtedly viewing the opportunity as a more lucrative one. For starters, the move helps them not preserve, but rather expand into an industry that has eluded them for some time. Furthermore, there is a great opportunity for Amazon to cross-sell to the Whole Foods customers more frequently and with greater ease as a result of this acquisition. The return on the technology conglomerate’s investment has the potential to be significantly larger than for a grocery store chain that makes the same purchase.

 

Business owners should take note of this by looking more broadly when preparing to sell their company. Instead of focusing strictly on price or industry, they should evaluate how their products, services, technology or customer base would be of benefit to another organization. While not the typical way to look at deals, this line of thinking is more accretive; in other words incrementally beneficial to the transaction’s economic value.

 

In the more than 20 years that I’ve been contracted to seek out and negotiate the sale of companies, I’ve never closed a deal where the buyer was on my client’s radar screen. That’s because we look at the opportunities from a different perspective. This comes from pouring over all aspects of the company; the history, key milestones that attributed to its growth and the events that helped the business get to where it is. We go through the operations, people, competition, industry trends and the financials to understand from where the revenue comes, how it’s generated and what costs are being incurred to support operations.  In doing so, we determine the elements of the company that make it worthy of acquisition.

 

Good investment bankers always think out of the box and take an approach that asks “who needs the company” instead of “who wants this company.” The subtleties can make a big difference in an owner’s wallet.

 

About The Author: Tim Malott is a Partner with Shoreline Partners, and has led numerous sale, merger, acquisition and financing assignments across a wide array of industries. A former CPA and bank president, his career spans public accounting and commercial banking as well as investment banking through which he has gained knowledge and experience in nearly every industry and business sector. Mr. Malott can be reached at tmalott@shoreline.com

 

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