By John Torru, Simpactful Chair and Senior Partner and Jill McIntosh, Senior Partner
Consumer packaged goods (CPG) companies will continue to face headwinds into 2024, as the need to drive increased unit volume growth and expand margins will put increased pressure on their brands to perform in the marketplace. Retailers in turn have been dialing up the pressure on brands to drive increased demand, or reset their pricing, to avoid losing share to private label or to upstart challenger brands that have been growing units and attracting new shoppers.
As a result, CPG companies are on the lookout for acquisitions to expand their product lines, reach new markets, and increase their revenue. There already have been a number of combinations this year that have been announced, and many more will continue into 2024.
However, despite their best efforts, many CPG acquisitions fail. According to most studies, the stats are sobering: Even after companies find the “right” company to acquire, nearly 7 in 10 acquisitions fail to provide value to shareholders. Simpactful practitioners are regularly called upon to support due diligence efforts.
Here are the top issues and steps you can take to avoid and acquisition:
Lack of Strategic Fit – A lack of strategic fit is a common reason for CPG mergers and acquisitions to fail. Acquiring or merging with a company that does not align with your longer-term strategy can be detrimental to its success and can introduce risk to the core business. Without a clear strategic fit, the target company’s products or services may not complement the acquiring company’s offerings – leading to market confusion, decreased sales, and damaged retail relationships. Additionally, without a clear strategic fit, the acquiring company may struggle to integrate the target company’s operations, which can create inefficiencies and additional costs. Simpactful practitioners are experienced in developing clear company and brand strategies and assessing potential M&A targets vs those the strategic guardrails.
Overpaying for the Acquisition – When companies pay too much for a target company, they create an immediate financial burden on themselves. The cost of the acquisition can quickly outweigh any potential benefits, leaving the acquiring company with a net loss or the inability to invest in driving demand. Overpaying can occur when companies overestimate the synergy savings and underestimate integration costs within their financial valuations. Simpactful’s finance practitioners, category and retailer experts are experienced at validating assumptions and understand the underlying costs that can drive poor returns.
Incomplete Due Diligence – Failing to conduct thorough due diligence can lead to significant problems down the line. This can happen because 1) Management does not want to burden current multi-functional resources with M&A due diligence, 2) Confidentiality concerns that prevent sufficient retailer and marketplace analysis around future outlook of the target company, category and brands, or 3) Insufficient experience to ask the right questions. Simpactful often supports confidential multi-dimensional due diligence efforts. Using our team of multifunctional brand practitioners and Retail executives, we can assess common trouble areas such as:
- Target company liabilities and risks
- Undisclosed costs
- Operational issues
- Requirements to achieve intended synergies
- Risks (distribution, regulatory, IP, competitive, pricing, etc)
- Barriers to integration (cultural, structural, contractual, etc)
- Expectation alignment (or misalignment)
Doing so can enable clients to better prepare for acquisitions, negotiate down the deal price and/or avoid costly missteps.
Cultural Differences – When companies come together, they need to be adaptive to understand one other’s culture and find ways to build on or harmonize their culture, values, and business practices. Failure to do so can lead to slow decision-making and poor communication, which can negatively impact the acquisition’s success. Incompatible cultures can also lead to a loss of key talent and hinder the ability to attract new talent. It can be especially helpful to have a 3rd party objectively assess potential cultural issues to identify requirements for success.
Failure to Retain Key Talent – Acquiring a company often means bringing on a new team of employees. However, if the acquiring company fails to retain the target company’s key talent, it can lead to a loss of institutional knowledge and skills. Additionally, losing key talent can make it difficult to effectively integrate the two companies and to realize synergies on the timing required to make the deal pay out as there may not be enough expertise to manage the integration process.
Mergers and Acquisitions can be a very viable way to grow and acquire new capabilities, and to defend against competition. However, they can also create costly missteps and organizational challenges.
Simpactful can help! Our M&A practitioners from both sides of the desk have the knowledge and experience to guide you across each critical phases of the acquisition process, ultimately driving improved due diligence and helping your company successfully integrate and stand up the combined businesses. Interested in learning more? Contact our team today at firstname.lastname@example.org or 925-234-6384.