Can the Target Pass The Competitive Intelligence Test? A step beyond traditional m&a analysis, competitive intelligence probes the target’s market for information that can be used across the entire buying process.

Competitive intelligence, an extraordinarily useful tool in reaching acquisition decisions, has been largely overlooked until recently. However, many acquirers now are recognizing the value of competitive intelligence in uncovering so-called “soft” business issues. These are subjective intangibles, typically hidden during due diligence, that often become painfully obvious during the integration phase after the deal is completed. Consider some commonly cited reasons for failed acquisitions. According to research conducted by Robert Spitalnic and Acquisition Horizons, the 10 leading integration problems include: *Market growth of the target is lower than expected. *Industry margins are less than expected. *Market position of the target is weaker than expected. *Competition is tougher than expected. *Preacquisition research is inadequate and inaccurate. *Management at the target is weak. *Profit margins at the target are narrower than expected. *Systems of the acquired company are not as developed as expected. *Postacquisition capital requirements are larger than expected. *Strategic planning is lacking. There is no better method than competitive intelligence for uncovering these problems prior to completion of an acquisition. Moreover, the information gleaned from a strong competitive intelligence program can be applied across the entire m&a spectrum from planning the acquisition initiative to negotiations. Competitive intelligence and analysis facilitate evaluation of potential acquisition targets from a 360-degree perspective. In his 1996 book Competitive Intelligence, Larry Kahaner defines competitive intelligence as “a systematic program for gathering and analyzing information about your competitors’ [or acquisition target’s] activities and general business trends to further your own company’s goals.” By enabling companies to gain a more comprehensive, well-rounded view of an acquisition candidate from a market perspective, competitive analysis can help to ensure the success of mergers and acquisitions. Competitive intelligence practitioners eschew canned solutions based on internal assumptions and beliefs. Rather, competitive analysts provide an external vision of the market and its emerging trends a view of the future through the eyes of the suppliers, competitors, and customers. Contacting a broad number of competitor, customer, and supplier experts eliminates the biases that may be inherent in limited samplings or unsupported assumptions. Tapping this pool of real-world experts provides the insight that permits viable strategic model building and logical extrapolation. The real answer to any problem is usually two or three questions deep. Analysts hear different perspectives, synthesize the trends, test the market “truths,” and resolve the inconsistencies to find salient, actionable information pivotal to strategic decisions. The cross-checking of experts eliminates prejudices and biases. Competitive analysts can come as close to predicting the future as is humanly possible. While conducting competitive intelligence activities is not difficult, most acquirers do not have the time or resources to conduct this research effectively. Professional competitive analysts leverage the acquirer’s time by scrutinizing informational puzzle pieces and developing pictures that shed light on the direction of a company’s corporate strategy, marketing plans, production schedules, and more. This type of insight can be extremely valuable to acquirers who should determine the competitive advantage (and disadvantage) of an acquisition target vis–vis its competitors. Practicing competitive intelligence in-house also is proscribed for the acquirer that wants to remain anonymous. It is virtually impossible to conduct objective research unless the researcher is an independent, third party to the market. Competitive analysts describe the purpose of their research only in general terms without revealing the names of clients or their specific strategic objectives. Most professional analysts have years of experience, often in other analytical arenas, and are able to spot trends and identify patterns efficiently. Competitive intelligence operatives gather their insights overtly. Secondary sources, such as the Internet, published material, and speeches, may be browsed for competitive insights, but the most valuable and most important research tool is the telephone. Analysts developing primary source research are well-spoken, articulate professionals who are able to develop interactive conversations with industry experts. Telephone research is effective for a number of reasons. The insights that are gained are timely. Since the interviews are “live” and interactive, the researcher can ask the respondent specific questions and follow-ups that act as cross-checks and verify information obtained through other means. Merely researching published information in the public domain does not offer this advantage. Clarification of confusing issues or apparent contradictions is much easier when the source is on the telephone. Contact with numerous experts brings researchers many steps closer to the knowable “Truth.” Instead of basing decisions on a one-sided perspective, acquirers are able to develop a complete understanding of the trends affecting an industry overall and the general competitive landscape of a marketplace which are critical to executing value-creating acquisitions that afford competitive advantage. According to widely disseminated commentary, approximately 70% of acquisitions fail and a principal reason is the neglect of soft issues cited above. These are qualitative rather than quantitative issues and in spite of extensive investigation by many acquirers, they often remain undiscovered until after the deal is closed. Soft business information concerns subjective, qualitative business issues opinions, assessments, and expert testimony about the company and its market. Competitive advantage, customer opinions, management ability, reputation, and corporate culture are examples of soft business information in contrast to hard business information involving tangible, objective, measurable, quantitative facts and figures. It is much easier to evaluate a target’s “hard” information, such as its balance sheet, than to determine whether it has a sustainable position in its marketplace or whether its customers are considering switching to an alternative supplier. The difference between “hard” and “soft” business information is similar to the dichotomy between “exact” and “inexact” sciences. Inexact scientists, such as doctors, political scientists, and economists, must rely on predictive instruments and the use of what Olaf Helmer of Rand Corp. described as expert judgment. In his 1958 treatise, “On the Epistemology of the Inexact Sciences,” Helmer noted that the purpose of all sciences is to explain past events and predict future events and to do so in an objective manner. Helmer said that as long as the process is objective, it may make more sense, from a research and analysis standpoint, to pay more attention to trends, traditions, fashions, attitudes, and climates than to statistical information, per se. A knowledge of past instances or statistical samples while indeed providing valuable information should not be the sole form of evidence used to support rational assignments of probability values, and perhaps not the main body. Hence the value Helmer places on experts. By speaking to multiple experts within a chosen industry segment, competitive intelligence professionals are able to achieve the inexact science researcher’s nirvana objectivity. Helmer commented, “The informed expert, with his resources of background knowledge and his cultivated sense of the relevance and bearing of generalities in particular cases, is best able to carry out the application of quasi-laws necessary for reasoned prediction in this field….For the expert has at his ready disposal a large store of (mostly inarticulated) background knowledge and a refined sensitivity to its relevance, through the intuitive application of which he is often able to produce trustworthy personal probabilities regarding hypotheses in his area of expertness.” In every industry segment and sub-segment, competitive analysts are able to locate the true industry “gurus.” These experts have vast experience and detailed, specific knowledge of the industry, its competitors, and the trends and dynamics affecting the industry. The expert is not a predictor or a fortune teller. According to Helmer, “It suffices that the expert be able to sketch out adequately the general direction of future developments to anticipate as we have already suggested some of the major critical junctures (“branch points”) on which the course of these developments will hinge, and to make contingency predictions with regard to the alternatives associated with them.” In the m&a context, acquirers should take advantage of the large store of mostly inarticulated knowledge and expertise inherent within competitive entities in a given market. By using the competitive intelligence process, consultants are able to find the industry experts who act as guides for the research and analysis effort. Competitive analysts lean on these guides only to gain informational puzzle pieces or nuggets of insight critical to developing a big-picture understanding of the dynamics of a marketplace. Market Entry Any decision concerning the efficacy of market entry requires complete understanding of the market’s big picture prior to an investigation of the supporting evidence for acquisition. Competitive business intelligence, like government intelligence, is useful in providing the answers to narrowly defined questions; but it also aids in the painting of macro insights for strategic decisions such as market entry. Every broad market-entry decision boils down to two fundamental questions: nDo we really want to be in this market? nIs this prospect as strong as we believe it is? Let’s assess a couple of possible reasons for a market-entry strategy. Suppose that you find that the potential future returns, market conditions, and trends of a market segment are enticing. That’s only for openers. It would be invaluable to know what the current competitors in this market think about its future viability. Are there threats from other segments in the market, i.e., product substitutions, marketing expansions? Are there threats from suppliers that may want to move up the value chain? Are the customers backward-integrating? Conversely, are customers’ interests moving away from offerings of the market segment under review and why? Is the grass truly greener on the other side of the fence? Have your current competitors not acted because they know something that you don’t? How can you determine what responses the competition will take to your entry? One acquirer that consulted with us was interested in entering a specific end-use segment of the pressure-sensitive tapes industry in which it had experience. Having heard that the overall industry was attractive, our client was searching for opportunities. Our research found that competitors segmented themselves by product line and not by application of the products. We introduced the client to a specific product category and found an attractive subset of that category which presented some exciting prospects. The subset represented significantly better opportunities than the general segment on which the client previously was focused. This subset was growing rapidly and competition was fragmented among several small, customized, and highly profitable players which made for a plentiful supply of acquisition candidates and prospects for consolidation. Market entry could be based on defensive rather than offensive reasons. Perhaps a diversified company is not having the success it expected with one of its operating units and would like to move it in a new direction. Before acting, the parent may want to evaluate the competitive advantages and disadvantages of various other market segments to determine whether to sell the operation or pursue acquisitions in new markets to support it. Or a defensive response might be dictated by emergence of a new, low-priced competitor that is taking threatening action against the firms already established in the marketplace. Competitive intelligence techniques can be used to formulate a potent counterattack by answering such questions as: What are the new competitor’s ultimate intentions? Why is it so successful? What steps can be taken to defeat the threat? Should the firm defending itself divest while it still has a substantial share of the market? Search-and-Screen Of course, market entry decisions are only the first step in the acquisition process. Once a market is deemed worthy of entry, savvy acquirers use competitive analysis to search for target candidates meeting very specifically defined criteria. By using the key competitors as proxies for the entire market, they may save the time it takes to research the market thoroughly and prevent the inevitable frustration that results when dealmakers find themselves negotiating with companies that are not good fits with their strategic goals. Searching for the ideal acquisition candidate should prompt much-needed considerations of the strategic intentions of the acquirer. Competitive analysts will start by asking the acquirer to draw a fence around the particular market of interest. This simple task sometimes creates vociferous internal debate about the true definition of the acquirer’s market and the actual description of the market of interest. Competitive intelligence helps to shape strategy by posing tough questions about strategic direction in general and, in particular, the specific acquisition search criteria which essentially form a wish-list for the ideal target. Competitive analysts will ask about the goals and objectives of the acquisition. Is the acquisition supposed to move the company in a particular strategic direction or to correct an existing problem, or both? Is the acquisition intended simply to defend a business area that is being threatened from external forces? Is it designed to leverage existing products and capabilities within the present market or provide entry into a new technological, end-use, product, or geographic area? Or is it an effort to improve profitability or just add market share? Confronting these issues will aid in the evaluation and ranking of acquisition candidates. If two companies appear virtually identical, the analyst must determine which is more attractive to the acquirer so that the analyst knows what aspects of the search to prioritize. A good competitive analyst should be able to think exactly like the client. The acquirer needs to describe the ideal acquisition target so that the analyst has a template that can be laid over the market of interest to find companies that fit. The competitive analyst must know all of the component parts of the idealized target to construct the template. For example, what geographic regions will be considered? If the financial condition is important, would the ideal candidate be a turnaround situation or a highly profitable company? Must the perfect acquisition candidate have a cultural fit with the acquirer? Is management capability or the willingness of management to remain on board important? What are desired EBIT and growth numbers? Is the acquirer concerned with such alternative issues as direct sales versus outsourced distribution, a unionized versus a non-union work force, niche product versus commodity product, and newly built facilities versus older facilities? How important is it for the candidate to have a well-recognized customer base? After completing the screening, the competitive analyst may be able to act as the acquirer’s agent in smoking out the willingness of the best candidates to be acquired. Although several players will rise to the top, few, if any, are actively for sale. In fact, the most attractive acquisition opportunities rarely put themselves on the block. By anonymously approaching attractive companies on a proactive basis rather than waiting until they put themselves into the m&a market, acquirers increase their options and have the potential to reduce acquisition costs. A financial buyer with an interest in the food industry once approached us for help. Initially, it expressed reluctance to work with a firm providing deal-flow information on companies not for sale and believed it would be easier to close deals with firms that were for sale. We demonstrated to the client that company after company was willing to consider at least a first meeting with a possible bidder and it began to recognize that proactive searches can eliminate competition for targets and reduce transaction sizes. That freed the buyer to look for the best targets. Due Diligence Once the acquirer identifies an especially attractive company that is willing to consider selling, it should incorporate competitive analysis into the due diligence process. Financial and legal due diligence have reached levels of sophistication and exactitude because experienced acquirers traditionally have been driven by cold, hard facts and figures. Yet, acquisitions still fail at an alarmingly high rate, suggesting that acquirers may need to reassess the thoroughness of their due diligence, especially on the soft business issues, where competitive intelligence can play an integral role. One such area is seller motivation. A first step is to ascertain exactly why the company might be willing to sell. Has the owner reached an advanced age, with no successors on board, and is in search of an acquirer? Or is the owner simply tired of fighting fires and wants to exit? Is there a major problem, i.e., financial, operational, competitive, investment, etc. from which the owner wants to run? What is the nature of this problem and can the acquirer deal with it? In addition to speaking anonymously to owners, competitive analysts conduct detailed conversations with market experts. These gurus offer insights concerning the future growth of the market, the relative competitive position of the target, the customer’s perceptions of the target, and the relative value of the target’s products or services versus those offered by competitors. If the acquirer is not familiar with a particular market, the buyer may wish to consider a market opportunity assessment essentially due diligence of the marketplace. The market may not be growing as rapidly as the acquirer had presumed. It may be dominated by an immovable gorilla or characterized by numerous small, niche players who have the ability to differentiate themselves well. The segmentation of the market into various product or end-use segments may be different than the acquirer presumed. Finally, the competitive dynamics of the market may indicate that market entry is unwise. The acquirer also may want to use competitive intelligence to benchmark the target against its current and future competitors. This process involves comparing the target’s strengths and weakness against those of competitors to determine whether the candidate enjoys a strong position or has the potential to make inroads in the industry. Comparing the financial standing of the company against others in the industry can be valuable. A detailed SWOT (Strengths/Weaknesses/Opportunities/Threats) analysis of the company can be a useful tool in conducting this analysis. Culture and management are common sticking points in the integration of two companies. The market-based research can be extended to include profiles of the people within an acquisition candidate to shed light on the dynamics of a target’s culture and strategy and its true management style. Even if the initial research goes no deeper than a simple organizational chart and brief biographical profiles of key managers, many acquirers believe this information can be instrumental in evaluating a candidate before traveling to its headquarters and facilities. Customer analysis can be very helpful in reaching strategic decisions. Target companies often tout their customer references, but that may not be good enough. These very same prized customers actually may be in the process of abandoning the company or may be displeased with the service, quality, or pricing of the target’s offerings and are hanging in only until they can settle on another supplier. Even customers that indicate that they are satisfied with their supplier may draw up a laundry list of desired services of an ideal supplier that differs from what they are actually getting. These are essentially unmet needs that a new supplier could easily address. In relatively large statistical customer samples, buyers can develop a “value map” of the targeted product or service that offers an idea as to the perceived value of a product versus its price. This tool can be invaluable in discounted cash flow (DCF) models as a method of verifying margin expansion or shrinkage due to future pricing trends. Competitive analysis can be an essential tool in developing and negotiating perceptions of value between the buyer and seller. In most cases, sellers are married to their views concerning the growth of the business, the growth of their market, strong relations with customers, and price inelasticity of their product or service. Based only on these rock-hard perceptions from the sell side, DCF models and future revenue projections can be driven to levels of value that are unacceptable, or at least unpalatable, to most buyers. Armed with real-world data generated from the market place, the competitive analyst may be able to present an alternative view that brings the seller back to earth. Competitive analysis also can be effective in evaluating potential financial and investment pitfalls that many acquirers discover only after the acquisition has been made. What better way to predict future capital expenditure levels than to survey existing competitors of the target on the productive life of the industry’s equipment, average maintenance expenditures, the state of the art on information systems, and authoritative estimates of replacement costs. In addition, competitors, suppliers, and customers can be contacted to determine potential trends that could squeeze margins, such as projections of slotting fees, raw material price increases, or market entry by a supplier seeking vertical integration. Information gathered through a competitive analysis program actually may be most helpful in explaining why a candidate should not be acquired. For example, competitive analysts may determine, based on their overall knowledge of an industry, that a company, even with trappings of historical success, is not positioned for future growth or will require a huge investment to reenergize it. That may be a red flag against proceeding. An example was the financial buyer that was excited about the prospect of closing a deal but came to our firm for assistance in the final stages. The two sides had few concerns about price and the target appeared to be exactly what the acquirer was looking for. But as a final formality, the acquirer asked us to perform a due diligence analysis by talking with the target’s customers about their purchase decision criteria, their unmet needs, their ratings of their suppliers, and whether they had intentions to switch suppliers. The research found that several large customers were contemplating shifting to an alternative supplier and virtually all of the customers described the target company as “arrogant.” Its service relationship ratings were abysmal. We convinced the buyer to rethink its plans. The buyer agreed that the acquisition did not make sense and saved more than $100 million by walking away from the deal. Negotiations The penultimate step in the acquisition process negotiations also can be keyed into a strong bank of competitive intelligence. Savvy buyers approach the negotiating table armed with detailed knowledge. They have an independently prepared, unbiased document which can be used to effectively counter overly aggressive projections from the sell side on future revenue growth, expansion of margins, and cash flow generation. Benchmarking, one of the core competencies of competitive analysts, adds to the information needed to confirm or reject the validity of seller claims. The seller may assert that the industry has been growing rapidly and that future growth will be even more rapid. If it can be proven that numerous industry experts disagree with this claim, the buyer’s postacquisition DCF estimates can be appropriately adjusted and a purchase price that is in line with more realistic appraisals of value can be structured. Or the seller may overstate the size of the available market. If the gurus of the industry reach a consensus that market size is smaller than asserted, the upside potential of the acquisition can be scaled back and the purchase price commensurately moderated. Holistic Approach At virtually any stage in the m&a process market entry, search-and-screen, due diligence, and negotiations competitive intelligence provides a holistic insight into the factors at play. Competitive analysis facilitates enlightened decisionmaking around these factors by offering sound strategic options. Soft Tissue, Hard Landing There is nothing soft about so-called “soft” business issues in sizing up an acquisition. These matters, involving realistic evaluations of the target’s product or service market and how well it competes there, are hard to probe and tougher to figure out through conventional m&a analysis. With the m&a bets becoming larger and larger, buyers increasingly are turning to competitive intelligence to generate information that may make the difference between success and failure of a deal. Conducted by independent researchers, competitive intelligence information can be used across the entire m&a spectrum to: * Determine the market’s real growth prospects and the target’s competitive prowess; * Figure out whether the target has a good reputation with customers; * Help an acquirer negotiate with a seller that has unrealistic price expectations; and * Strengthen the due diligence process with information on the soft issues.