Florence Joffroy-Black and Dave Sheppard, MedWorld Advisors06.13.19
Studies show firms actively engaged in M&A increase their shareholder returns an average 25 percent to 100 percent more than their non-acquisitive counterparts over time. There are several key reasons for this additional shareholder value:
With regulatory constraints slowing time to market, companies are finding organic growth to be more difficult than ever before. As a result, some organizations are incorporating M&A as a key part of their long-term growth strategies.
Successful high-growth companies often incorporate M&A as part of their R&D programs. Over time, it’s important for organizations to eliminate the growth-inhibiting mindset “not invented here (NIH)” syndrome (i.e., if it’s not invented within the company, it’s not good). To prevent this NIH syndrome from taking hold, some company boards incentivize their C-Suites to drive a certain percentage of long-term growth through inorganic activities. Employees (even executives) can easily become too complacent or over-confident about their company’s respective competencies. Finding ways to combine organic and inorganic growth can lead to the best possible value increases over time.
Organizations seeking inorganic growth must be patient and persistent, as they’ll likely have to kiss a few frogs before finding a noble purchase that adds value. A competitive market requires patience and significant planning on focused segments; opportunities are practically guaranteed to companies that build relationships and stay alert.
On the opposite side of M&A business scenario planning is the deal. Timing is important in all M&A transactions, and determining the best moment to broker an agreement takes skill, knowledge of the market, and pecuniary acumen. As one of the longest economic expansions in history continues (some forecasts project growth continuing for at least another year or two), valuations continue to be on the high side for sellers. Private equity firms and strategics now have more money than ever to put to work and M&A is indubitably part of their business model.
There is current demand for almost any kind of business as long as it is profitable (and it doesn’t have to be a big money-maker). Although “size matters” in terms of ultimate valuation, company mass is not as significant once an organization meets a minimum threshold of $1 million (and greater) in EBITDA. MedWorld Advisors is consistently approached by potential acquirers (both private equity and strategics) seeking quality medtech businesses in developed markets that know how to run a profitable manufacturing or service operation.
Valuation often begets questions about the factors that impact enterprise value (EV)—the measure of a company’s total worth. EV can be difficult to control because it is impacted by various external forces: interest rates, capital availability, inflation, taxes, business cycle timing, etc. Companies, however, can impact EV by performing well in the items within its control, thereby boosting its intrinsic value (IV). There are numerous factors organizations should consider to maximize their IV, including:
Selling a company takes a confident, disciplined approach. A confidential process is best. Sellers without much experience conducting transactions should recruit M&A expertise, since buyers (either private equity or strategics) are likely to have seasoned deal-makers on their team. Sellers should try to match their capabilities with buyers in negotiation skills and process while effectively running the business during negotiations.
Both buyers and sellers should consider all opportunities, regardless of geography. While there are obviously good businesses in the United States, there are also excellent opportunities throughout the world. Some recent examples of international partnering follows:
There are dozens more examples, but the lesson here is that buyers can be anywhere—situated conveniently next door or on the other side of the world. One way companies can maximize value is by obtaining as many players as possible in the process, no matter where they call home.
Indeed, buyers may find the best opportunities for expansion and inorganic growth in other parts of the world. Global expansions provide organizations many additional benefits, including:
Despite the many benefits to global acquisitions, medtech organizations should nevertheless tread cautiously when pursuing these opportunities. Those that fail to understand how such deals fit into their long-term plans will be blinded by the superficial possibilities that may be regrettable in the future.
Whether buying or selling, it’s important for companies to consciously choose their paths in order to manage the process and create the best future value.
Florence Joffroy-Black, CM&AA, is a longtime marketing and M&A expert with significant experience in the medical technology industry, including working for multi-national corporations based in the United States, Germany, and Israel. She can be reached at florencejblack@medworldadvisors.com.
Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now a managing director at MedWorld Advisors. He can be reached at davesheppard@medworldadvisors.com.
- M&A deals can add market share, as they allow companies to sell their products and services to new customers
- Acquisitions help foster inorganic innovation, which can lead to new products and/or services
- M&A improves talent through the combining organizations’ synergies
- Perhaps most importantly, M&A benefits the bottom line via cost reductions
With regulatory constraints slowing time to market, companies are finding organic growth to be more difficult than ever before. As a result, some organizations are incorporating M&A as a key part of their long-term growth strategies.
Successful high-growth companies often incorporate M&A as part of their R&D programs. Over time, it’s important for organizations to eliminate the growth-inhibiting mindset “not invented here (NIH)” syndrome (i.e., if it’s not invented within the company, it’s not good). To prevent this NIH syndrome from taking hold, some company boards incentivize their C-Suites to drive a certain percentage of long-term growth through inorganic activities. Employees (even executives) can easily become too complacent or over-confident about their company’s respective competencies. Finding ways to combine organic and inorganic growth can lead to the best possible value increases over time.
Organizations seeking inorganic growth must be patient and persistent, as they’ll likely have to kiss a few frogs before finding a noble purchase that adds value. A competitive market requires patience and significant planning on focused segments; opportunities are practically guaranteed to companies that build relationships and stay alert.
On the opposite side of M&A business scenario planning is the deal. Timing is important in all M&A transactions, and determining the best moment to broker an agreement takes skill, knowledge of the market, and pecuniary acumen. As one of the longest economic expansions in history continues (some forecasts project growth continuing for at least another year or two), valuations continue to be on the high side for sellers. Private equity firms and strategics now have more money than ever to put to work and M&A is indubitably part of their business model.
There is current demand for almost any kind of business as long as it is profitable (and it doesn’t have to be a big money-maker). Although “size matters” in terms of ultimate valuation, company mass is not as significant once an organization meets a minimum threshold of $1 million (and greater) in EBITDA. MedWorld Advisors is consistently approached by potential acquirers (both private equity and strategics) seeking quality medtech businesses in developed markets that know how to run a profitable manufacturing or service operation.
Valuation often begets questions about the factors that impact enterprise value (EV)—the measure of a company’s total worth. EV can be difficult to control because it is impacted by various external forces: interest rates, capital availability, inflation, taxes, business cycle timing, etc. Companies, however, can impact EV by performing well in the items within its control, thereby boosting its intrinsic value (IV). There are numerous factors organizations should consider to maximize their IV, including:
- Operational efficiencies: Companies must be highly competent in all facets of the business (profitability cannot be its sole or main focus)
- Talent: An effective acquisition team will secure the proper talent
- Regulatory: Products must have the latest regulatory clearances and follow an established supervisory pathway in their respective markets
- Intellectual Property: Establishing IP with a potential for future expansion and protection attracts buyers and adds value
- Quality: High-quality products/services are guaranteed to raise an organization’s intrinsic value
- Reimbursement: An established reimbursement pathway for current and future products is a requirement for regulatory approval nowadays.
- Clinical validation: Exceptional key opinion leaders and strong clinical evidence of product performance are preferable to an outcome study proving a technology’s economics
- R&D: A solid pipeline of new products/services and influential innovators is attractive to buyers
- C-Suite: Companies should employ executives capable of running the company without the founder
- Sales: Medtech firms should strive for above-market Cumulative Average Growth Rates (CAGR) for all products/services
- Customer Base: A record of consistent sales and growth with a wide customer base is important. Having only a few big customers creates what is known as “customer concentration” risk
- Marketing: Companies should position themselves as market leaders in their segments
- IT: There was a time when information technology was simply an internal function supporting the business. But the digitization of medtech products now requires organizations to devise a digital security plan for their devices
Selling a company takes a confident, disciplined approach. A confidential process is best. Sellers without much experience conducting transactions should recruit M&A expertise, since buyers (either private equity or strategics) are likely to have seasoned deal-makers on their team. Sellers should try to match their capabilities with buyers in negotiation skills and process while effectively running the business during negotiations.
Both buyers and sellers should consider all opportunities, regardless of geography. While there are obviously good businesses in the United States, there are also excellent opportunities throughout the world. Some recent examples of international partnering follows:
- A Canadian company agreed to sell to an Israeli organization after considering potential suitors in Japan, Europe, and the United States
- An Indian company commercialized a product in China through a strategic partnership that encompassed potential distribution opportunities in Europe and the United States
- An American private equity organization purchased a U.S. medtech manufacturing firm (sometimes it still pays to stay close to home)
- A “virtual” startup developed in the United States, India, and Singapore moved to a new corporate home in Germany. Potential acquirers are located in the Americas, Europe, Japan, China, and India
There are dozens more examples, but the lesson here is that buyers can be anywhere—situated conveniently next door or on the other side of the world. One way companies can maximize value is by obtaining as many players as possible in the process, no matter where they call home.
Indeed, buyers may find the best opportunities for expansion and inorganic growth in other parts of the world. Global expansions provide organizations many additional benefits, including:
-
New geographical market access for their products and services
-
There is significant growth potential for companies that manufacture products in a country specifically for local sale
- With on-again, off-again tariff wars, locally made, locally sold products can be a competitive advantage
- Some countries will favor companies that manufacture products locally
- Additional synergistic benefits are obtainable by accessing local suppliers. Such a strategy gives companies new capabilities and can save money
-
There is significant growth potential for companies that manufacture products in a country specifically for local sale
Despite the many benefits to global acquisitions, medtech organizations should nevertheless tread cautiously when pursuing these opportunities. Those that fail to understand how such deals fit into their long-term plans will be blinded by the superficial possibilities that may be regrettable in the future.
Whether buying or selling, it’s important for companies to consciously choose their paths in order to manage the process and create the best future value.
Florence Joffroy-Black, CM&AA, is a longtime marketing and M&A expert with significant experience in the medical technology industry, including working for multi-national corporations based in the United States, Germany, and Israel. She can be reached at florencejblack@medworldadvisors.com.
Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now a managing director at MedWorld Advisors. He can be reached at davesheppard@medworldadvisors.com.