Identifying a Merger & Acquisition Target


Master's Thesis, 2019

84 Pages, Grade: 2,3


Excerpt

Contents

I. List of Tables

II. List of Figures

III. List of Abbreviations

1. Introduction
1.1. The Client
1.2. Challenge and Objectives
1.3. Consulting Approach

2. Internal Analysis
2.1. Organization and Culture
2.2. Capabilities and Core Competences
2.3. Product and Service Portfolio

3. External Analysis
3.1. Market View
3.1.1. Market Development
3.1.2. Trends in the Market
3.2. Customer View
3.2.1. Customer Analysis
3.2.2. The Customers’ Voice
3.3. Competition

4. Evaluation of Findings
4.1. SWOT Analysis
4.2. Portfolio Analysis

5. Recommendations
5.1. General Recommendations
5.1.1. Increase Customer Satisfaction
5.1.2. Develop Further Core Competences
5.1.3. Expand Product and Service Portfolio
5.1.4. Adapt Organization
5.2. M&A Strategies and Target Characteristics
5.2.1. Synergistic M&A Approach
5.2.2. Diversifying M&A Approach
5.2.3. Strategic M&A Approach

6. Conclusion

IV. List of References

V. Appendix A: Customer Satisfaction Survey

VI. Appendix B: Presentation

VII. Glossary

Abstract

The consulting report "Identifying a Merger and Acquisition Target" describes the consulting project carried out at the medium-sized German IT service provider ITSERV GmbH. Like many companies in the IT industry, ITSERV experiences major difficulties filling vacancies. As a people business the company’s growth is hampered by the lack of skilled IT professionals. Since all opportunities to expand the workforce and to grow organically with more employees are exhausted, the CEO of ITSERV wants to grow externally through a company acquisition. In order to support his M&A efforts with a sound approach, the CEO has sought the help of an external consultant to find out what a suitable takeover candidate for the company should look like. In the course of the ensuing consulting project, various internal and external analyses are conducted to look more closely at the company and its market and to identify development opportunities for the company that could be implemented through an appropriate M&A strategy. The analyses include classic analysis tools such as the SWOT analysis and the portfolio analysis which - where applicable - are supplemented by other suitable methods and models. The results of this determination of ITSERV's status quo provide the basis for the identification of development opportunities for the company. In order to make these usable for ITSERV’s management independently of the M&A efforts, general recommendations are formulated in this regard. In order to answer the CEO's original question about suitable acquisition targets, three possible approaches to an M&A strategy along with priorities for the search for takeover candidates are developed, based on the results of the analysis. Moreover, this paper also provides critical considerations concerning ITSERVs way forward with regard to the CEO's M&A efforts such as the importance of considering aspects of corporate culture during due diligence and in the post-merger integration of an acquired company.

I. List of T ables

Table 1: Professions at ITSERV GmbH

Table 2: Excerpt Skill Matrix ITSERV GmbH

Table 3: Market Volume Development

Table 4: Findings SWOT Analysis

II. List of Figures

Figure 1: Sales Development at ITSERV GmbH

Figure 2: Congruence Model

Figure 3: Organizational Structure ITSERV GmbH

Figure 4: Skill Level at ITSERV GmbH

Figure 5: Sales by Portfolio Unit 2018

Figure 6: Sales by IT Market Segment 2018

Figure 7: Micro & Macro Environment

Figure 8: Sales Growth Rates until 2019

Figure 9: IT Trends Found in Market Research Reports

Figure 10: IT Trends Longitudinal

Figure 11: Importance of IT Trends

Figure 12: Revenue Distribution

Figure 13: Overall Customer Satisfaction

Figure 14: Detailed Customer Satisfaction

Figure 15: Familiarity with IT Trends

Figure 16: Importance and Relevance of IT Trends to Customers

Figure 17: Nine Box Portfolio Matrix

III. List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

Growing their business is one of the most essential aspirations of entrepreneurs. However, what can business leaders do when all the conditions for growth are met, but their company does not attract enough talent to meet customer demand? This predicament is one that is shared by many entrepreneurs and established businesses throughout the country. Order books are full, and customers demand even more but the manpower to cope with demand simply isn’t available. The lack of skilled employees noticeably impedes business growth. According to recent figures 64% of all companies in Germany have faced difficulties filling a vacancy in 2018 (Statistisches Bundesamt, 2018a). Although presently there is no nation-wide shortage in qualified workers, filling vacancies with suitable staff is already impossible in certain regions and sectors (Bundesministerium für Wirtschaft und Energie [BMWi], 2019). Companies of all sizes are competing for professionals especially in business areas such as IT and engineering. It seems that the war for talent has become reality and more often than not big corporations win against small and midsized companies. Lacking the power to do anything about this, SMEs often just surrender and leave the field to their bigger and more established competitors. However, resignation does not have to be the end of it. Like the big players in the market, SMEs may be able to use other means and strategies to meet their growth targets. What has long been common practice, especially for corporations and large or medium-sized companies such as outsourcing to nearshore or offshore destinations or mergers and acquisitions might also help small businesses grow.

One company, the German ITSERV GmbH1, wants to take the latter approach and is determined to achieve growth against all odds by engaging in M&A. The company has only been in business for five years but has big goals that are all the more ambitious, given the scarcity of IT staff. The quote from Richard Branson preceding this thesis symbolizes the determination and defiance with which the CEO adheres to his goals. While the competition is content with stagnation at a comparatively high level, ITSERV's management is determined to accelerate its growth and expand its business activities. However, being occupied full time with day-to-day business and lacking experience in the field of mergers and acquisitions does not help the CEO in proceeding with this plan. Even if there were enough time, the question where to start remains. And while there are vast numbers of books that detail every aspect of M&A one of the most crucial tasks – finding a suitable target – depends too much on the specific circumstances of the company to describe it in general. In order to identify a viable acquisition target, which is essential to creating a favorable starting position that facilitates growth in the long run and helps the partners succeed as a joined business, ITSERV sought the help of the author of this thesis.

This thesis describes the consulting project undertaken to support ITSERV GmbH find an answer to the question: What should ITSERV be looking for when searching for potential acquisition targets? The outcome is a selection of possible M&A strategies that are aligned with the strengths and weaknesses of the company and the opportunities and threats in its market and that help the company in the search for a viable acquisition target. In the course of the project the company itself and its portfolio are analyzed to identify performance drivers and performance gaps within the company that indicate what the company is already good at and where there are performance gaps that need attention. Unfulfilled customer requirements that could potentially be exploited are also uncovered in this context. In order to align the M&A strategy to the market, trends and developments in the relevant market are furthermore identified. The analysis is complemented by a survey of ITSERVs own customers. The survey reveals what is important to the company’s customers and provides an indication regarding the customers’ satisfaction with the company's services and products. Summarizing all the results and evidence from the analysis, this paper concludes with several recommendations for the CEO, including M&A strategies with search profiles for viable acquisition targets.

1.1. The Client

ITSERV is a small IT service provider located in central Germany. It is an owner run business with a team of five employees providing nationwide IT and consulting services to customers of various industries including the public sector. The services rendered range from the initial setup and implementation of IT infrastructures and server platforms to the realization of complete ERP solutions. The company is partner to various leading hard- and software producers such as HP, Microsoft, Kaspersky and Sophos as well as one provider of a proprietary ERP solution2. Additionally, ITSERV provides services related to data protection and IT security.

The company was founded in 2014 by its current owner and CEO after his previous employer went out of business for health reasons. In an asset deal ITSERV took over the previous’ company’s staff, office equipment, intangible assets such as protected name brands, copyrights and exploitation rights and most of its customers. Having had a head-start like this, ITSERV was able to finish the company’s first year with exceptionally good financial results. In the following years the company grew at an average rate of 5.4% (CAGR) annually. See the following chart for a year-on-year comparison of sales and growth rates.

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Sales Development at ITSERV GmbH

1.2. Challenge and Objectives

ITSERV’s CEO wants to grow the company to the point where he is able to withdraw from day-to-day business and concentrate on sales activities and on managing the company. At the moment, the CEO as well as his employees are fully productive, and all capacities are fully utilized. Despite the promising development of sales figures depicted above, the firm keeps lagging its much higher potential. The main reason for this is to be found in one major challenge that the company shares with its competitors as well as with companies of various other industries: the shortage of qualified staff. Without the manpower to meet the high demand of its customers ITSERV’s growth is limited to what its employees and the owner himself can handle. With today's workforce, the company's organic growth potential has been exhausted. As mentioned in the introduction, the hiring of new employees is hardly possible at the moment as demand for IT professionals exceeds current supply by far. Over 60 percent of companies in Germany suffer from these shortages and cannot fill vacancies (Statistisches Bundesamt, 2018a). Also, attracting and keeping young talent proves difficult. Training employees from the ground up requires high up-front investments, which often cannot be recouped. Having completed their professional education chances are high that employees start looking for something new. Moreover, most young IT professionals still prefer the safety of large corporations to the flexibility and personal freedom that small companies can offer. Being a young company in a very competitive market ITSERV can also not afford to compete with competitors for IT professionals on a salary basis. Having exhausted all options to attract additional resources for achieving organic growth, ITSERV’s management plans to expand its business by engaging in merger and acquisition. The CEO wants to buy another IT service provider. However, the intentions of the CEO are not only to add manpower to the firm, he also wants to expand the company’s portfolio and customer base. So far, the acquisition of another company was just an idea that should be pursued at some future point in time. Consequently, the search for a suitable target was done sporadically and without a structured approach let alone an M&A strategy. In order to move forward with his plans, the CEO of the company engaged the author of this thesis as an external consultant to help determine characteristics of merger & acquisition targets that will support ITSERV’s goals.

1.3. Consulting Approach

The CEO of ITSERV wants to grow his company through M&A. However, there is no defined strategy that guides the development of the company’s portfolio in a certain direction. Consequently, there is also no M&A strategy that provides orientation in the search for acquisition targets. Depending on the firm’s strategic objectives though, different characteristics may be important in takeover candidates. In order to avoid committing a costly or even existence-threatening mistake by not anchoring the M&A engagement in an overarching strategy it seems necessary to find out the general direction that ITSERV should be developing towards and then define possible strategic approaches involving M&A. This intermediate step of strategy development makes the search for takeover candidates a strategic activity as opposed to an opportunistic one. As a preparatory step to this process, conducting a thorough analysis of the firm’s current situation and of the market it operates in is necessary. Based on this analysis suitable M&A strategies can be derived, and the resulting characteristics of viable acquisition targets can be defined. This approach is also in accordance with the recommendations from the Boston Consulting Group – one of the leading experts in the field of M&A – who state that “effective target identification is built on the foundation of a sound portfolio strategy” (2019).

Accordingly, the consulting project conducted at ITSERV begins with an analysis of the company and its market. First the internal analysis focuses on the company’s organizational structure, its capabilities, and its portfolio to identify strength and weaknesses within the company’s current organization and operations. Then, the external analysis focuses on relevant aspects of ITSERV’s micro and macro environment to identify opportunities and threats that should be considered. This includes an examination of ITSERV’s target market, the current market trends and a survey of ITSERV’s customers. Findings from the analysis are then summarized to provide a concise overview of the firm’s status quo, its strength and weaknesses, and the opportunities and threats found in its market. Based on these, general recommendations regarding the development of ITSERV’s portfolio, the satisfaction of its customers, and its internal organization are formed. Finally, M&A related strategic options are formulated and the characteristics of acquisition targets for each of these M&A strategies suggested. The predominant models and methods applied within the consulting project are: SWOT analysis, portfolio analysis using the GE-McKinsey Nine-Box Matrix, primary market research (survey) and secondary market research. Additionally, interview techniques are applied to obtain information from employees and management. Numerical data are analyzed quantitatively by applying descriptive statistics and qualitatively by interpreting and combining information. Where applicable and necessary, external sources are used to substantiate findings and add critical information.

2. Internal Analysis

The internal analysis, which is described in detail in the following section, serves to develop an understanding of ITSERV’s internal performance drivers and areas of improvement by uncovering and assessing the company's strengths and weaknesses. As indicated by the internal perspective, this part of the analysis identifies input for the SWOT analysis that will be detailed in a later chapter. It furthermore provides information for the identification of strategic opportunities which the company could exploit and that should also be considered in ITSERV’s approach to M&A.

The model on which this analysis is predominantly based is the congruence model developed by Tushman & O'Reilly. It serves to evaluate how culture, formal organization, tasks and workflows, and staff contribute to or hinder the accomplishment of an organization’s strategy (Tushman & O'Reilly, 2002). The following Figure 2 illustrates the interrelations described in the model.

Abbildung in dieser Leseprobe nicht enthalten

Figure 2: Congruence Model

- adapted from Tushman & O'Reilly, 2002

Special emphasis is given in this context to the analysis of organization, people and culture at ITSERV. The different perspectives that have been taken are described in the following chapters: The first subchapter inspects the firm’s organizational setup, culture, and relevant aspects of employee remuneration. The second subchapter derives the organizational capabilities and core competences of the company through an in-depth analysis of its employees' skills. Finally, the company's portfolio of products and services, as well as the distribution and development of revenues, are examined.

2.1. Organization and Culture

ITSERV has a divisional structure, that divides the company into two business areas each responsible for a particular group of products and services. The business area IT (hereinafter referred to as ‘BA IT’) focuses on the part of the business that provides IT services such as hardware and infrastructure maintenance, and standard software support. The business area ERP (hereinafter referred to as ‘BA ERP’) is responsible for ITSERV’s solution business. Employees in this business area design, implement, customize, and support ERP solutions. While the BA IT has its own head, the BA ERP is headed by the CEO himself. Both business areas are run as profit centers and must therefore be profitable on their own.

The company is managed and represented by its founder and CEO who – aside from leading the BA ERP - also takes care of sales, human resource management and various other functions within the company. Since the CEO is also proficient in the design and customization of ERP solutions, he furthermore works in the BA ERP as a solution designer and software developer. Likewise, the head of the BA IT also works actively for external customers and doubles as the CEOs deputy during his absence. As a result, ITSERV does not have full-time managers who only incur internal costs that cannot be offset against customers. Overall, it can be stated, that the level of organization at ITSERV is appropriate to its size and that the hierarchical differentiation is low. See the following Figure 3 for an overview of the firm’s organizational structure.

Abbildung in dieser Leseprobe nicht enthalten

Figure 3: Organizational Structure ITSERV GmbH

Work at ITSERV is generally organized based on skill and individual workload. Essential decision-making factor in the assignment of tasks is achieving the best match between personal ability and requirements of the task. Employees at ITSERV have high degrees of freedom in the completion of their work assignments and in most other aspects of their work. However, team collaboration is encouraged in day-to-day business as well as in the completion of special tasks. This is indeed not only an aspiration but a necessity considering the size of ITSERV. The company is simply too small to rely on highly specialized staff. If needed, everyone must be able to do everything to a certain extent. Consequently, generalists with a broad spectrum of skills are preferred when it comes to hiring new staff.

ITSERV’s employees have a 5-day, 40-hour week and are by contract entitled to 24 days of paid leave. Although this slightly exceeds the statutory leave entitlement of 20 days, it is less than the market average for similar sized companies, which – based on data from 2018 – is at 27.3 days per year (COP CompensationPartner, 2018). Salaries paid by ITSERV are slightly above the industry average paid in comparable companies for the professions working for the company (StepStone GmbH, 2019a, 2019b, 2019c). The individual salary depends on personal experience and expertise and is negotiated with the CEO, as the company is not bound by collective bargaining agreements. As additional benefits employees are allowed to use company cars for private errands, IT equipment is state of the art, cellphones are modern smartphones and the plans allow for private usage. Furthermore, working from home is generally allowed and is especially in the BA ERP very common. Most employees in this business area work from home 80% of their time. ITSERV also invests regularly in developing the skills of its employees. Training and external certifications are provided to employees according to individual wishes and the needs of the company.

The organizational culture at ITSERV can be described as relaxed and leaning to the informal. All employees and management address each other by their first names. Communication is characterized by a very casual and humorous but at the same time respectful tone. Despite the relaxed atmosphere, the team always demonstrates the appropriate seriousness and professionalism in day-to-day business. Regular team events and at least one company party per year, in which also partners, and customers are invited, are standard at ITSERV. Full attendance at these events is further evidence of the good relationship of management and staff.

Taking into account the company's cost structure, with a share of almost 50% of total costs personnel costs represent by far the largest cost position of the company. In personnel-intensive businesses such as the provisioning of IT services this is a very common circumstance. This characteristic of ITSERV’s business classifies the company as a people business (Barber, Catchings, & Morieux, 2005; Barber & Strack, 2005). The fact that the well-being of the company’s employees is very important to the CEO shows that he understands the importance of staff in people businesses.

2.2. Capabilities and Core Competences

In people businesses the capabilities of a company are directly dependent on the knowledge and skills of the employed workforce (Barber & Strack, 2005; Ulrich & Smallwood, 2004). The analysis of ITSERV’s capabilities and competences therefore focusses on the company’s staff and evaluates their professional background, their skills, and respective skill level as indicators to appraise what the firm is good at and where there is room for improvement.

At ITSERV preeminently three different professions are represented. The company employs mostly IT specialist for systems integration, IT specialists for software development, and IT-systems management assistants. All of which are training occupations offered in the German dual vocational training system. The three trades differ mainly with regard to the focus of their training concerning software engineering. While software development specialists are trained to develop software, the focus of the training of systems integration specialists is more on the integration of software and hardware as functioning solutions (Industrie- und Handelskammer Darmstadt, 2019a). The IT-systems management assistants on the other hand are proficient in the business side of information and telecommunication technology; their training focusses on the distribution of software solutions (Industrie- und Handelskammer Darmstadt, 2019b). Of the six employees at ITSERV three are IT specialists for systems integration, two are IT systems management assistants and one is IT specialist for software development. The latter, however, is still in training and has one more year of vocational training to go.

The average job experience of the company’s staff is 6.3 years. Only the CEO and the IT division head are more experienced and have more than 5 years of relevant job experience. Since most of the employees have been taken over from the CEO’s previous employer, the majority of ITSERV’s current employees have either completed their professional education at the preceding company or at ITSERV. See the following Table 1 for a headcount per profession and years of relevant job experience.

[...]


1 Company name changed for anonymity reasons.

2 For anonymity reasons, the name of the ERP solution is not disclosed.

Excerpt out of 84 pages

Details

Title
Identifying a Merger & Acquisition Target
College
International University of Applied Sciences Bad Honnef - Bonn
Grade
2,3
Author
Year
2019
Pages
84
Catalog Number
V537149
ISBN (eBook)
9783346153807
ISBN (Book)
9783346153814
Language
English
Tags
M&A, Merger and Acquisition, Portfolio Analysis, Internal Analysis, External Analysis, SWOT, Secondary Market Research, Primary Market Research, Consulting, Synergistic, Diversifying, Strategic
Quote paper
Daniel M. Wolański (Author), 2019, Identifying a Merger & Acquisition Target, Munich, GRIN Verlag, https://www.grin.com/document/537149

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