Acquisition Strategy – A Complete Guide for Businesses in Canada

In Canada, a significant number of businesses willing to expand do not solely rely on organic growth, but instead opt for acquisitions. An acquisition strategy is simply the roadmap for how, when, and why a company seeks such opportunities. It does not approach acquisitions as a reactive action in one-off situations, but as an action taken in the long-term interests of the business. For example, a business may acquire a target company for market extension, to enter new markets, access patented technologies, or obtain a specialized customer base or talent pool.

This can be used to speed up the growth of Canadian SMEs and mid-market companies, generating competitive advantages and increasing market reach. Without a clear strategy, though, acquisitions can lead to the dangers of overpayment, cultural alignment issues, or regulatory scrutiny. 

Due diligence can be effective only when it is done securely. In this process, sensitive data and financial or legal documents are exchanged to facilitate successful deals. A virtual data room (VDR) offers a secure platform to examine, exchange, safeguard data, and streamline the M&A due diligence process.

The article will explore the meaning of an acquisition strategy, its contrast to an exit strategy, and how it fits in the larger context of mergers and acquisitions (M&A). 

What is an Acquisition Strategy?

Fundamentally, an acquisition strategy involves a systematic process that informs the manner by which a company identifies, assesses, and absorbs strategic partners or target companies. This strategy is applied by private equity firms, mid-market companies, and larger corporations to support long-term growth objectives, rather than responding to opportunities as they arise, such as expanding market access, acquiring technologically advanced solutions, or boosting market share in areas like logistics, healthcare, or the pharmaceutical industry.

One should not mix an acquisition strategy and an exit strategy. An acquisition strategy concerns how your own business expands through acquisition or merger with another business, often involving strategic buyers, whereas an exit strategy concerns how your business eventually gets out of business through a sale, IPO, or succession planning. They both belong to strategic planning, but they serve very different purposes: one of them is concerned with scaling up, whereas the other is concerned with stepping back.

An acquisition strategy is also a subset of the general M&A strategy, which may also include mergers, joint ventures, or strategic alliances. The general term is M&A, and the acquisition strategy is one of the strategic objectives. 

An example is that, where some Canadian companies pursue mergers to consolidate market share, others acquire a target company to gain intellectual property, existing customer base, or regulatory licenses swiftly. This is because an acquisition strategy clearly specifies the approach to take when acquisition opportunities are identified to eliminate competition: financing, due diligence, and integration.

Acquisition Strategy vs M&A Strategy

An acquisition strategy and an M&A strategy are not similar, though the terms are used interchangeably. An acquisition strategy is specifically concerned with how a firm finds, analyzes, and incorporates another company from different markets as part of its development agenda. Conversely, an M&A strategy is more general. It includes all forms of transactions, including mergers, acquisitions, divestitures, and joint ventures.

The most important distinction is in scope. A subset of M&A strategy is an acquisition strategy. Considering a logistics SME as an example, the company can decide to acquire a smaller company that has a good e-commerce presence. In the meantime, its general M&A policy may also include the potential to consolidate with local strategic partners to grow or to enter into a joint venture to share resources without complete acquisition.

The other source of confusion is an acquisition plan vs an acquisition strategy. The strategy defines the long-term direction — why and what conditions make acquisitions a good idea for your business. It is less strategic; it maps out the step-by-step procedure of a particular deal, including finding sources of financing, undertaking due diligence, and making integration plans. Simply put, the strategy is the why, and the plan is the how.

These differences are the basis of comparing different deal structures. The next step is to consider the M&A nature and its differences.

Types of Mergers and Acquisitions

Not every acquisition or merger is equal. The type of acquisition or merger helps business owners and executives in choosing the correct path toward their objectives.

Types of acquisitions:

• Horizontal acquisition. In this business model, a firm buys another firm within the same market. Another Canadian example is when Loblaw bought Shoppers Drug Mart. This expanded the pharmacy business presence for Canada’s largest grocer.
• Vertical acquisition. In a vertical acquisition, a company acquires a supplier or distributor to obtain greater control over its supply chain. An example is the international dairy purchases made by Saputo to get stable production and distribution channels.
• Congeneric acquisition. This is when a pair of businesses share the same customers in different ways. For example, the Canadian Western Bank purchase by National Bank increased its customer base, market value, and regional coverage in the banking field.

Types of mergers:

• Horizontal merger. It happens when companies involved in the same industry form a market extension merger. A good horizontal merger example is Suncor and Petro-Canada, which established one of the largest integrated energy companies in Canada.
• Vertical merger. This is a merger between the supplier and the customer, which helps streamline operations, eliminate potential risks, and reduce costs. The vertical merger example is Rogers-Shaw Canadian telecom consolidation. This entailed the sale of assets such as Freedom Mobile to satisfy regulatory demands.
• Congeneric merger. This involves merged companies that are not related uniting. International transactions like the Rio Tinto acquisition of Alcan.

Note: Check Recent M&A Deals for real-world examples.

Acquisition vs Merger

The major distinction between a merger and an acquisition is control. In an acquisition, a company acquires another one, and in a merger, two businesses create a new united company, often with common ownership.

Now, let’s focus on the acquisition planning process steps.

Acquisition Planning Process: Step by Step

The most promising acquisition can fail because it is not planned. An organized process assists business owners and executives in Canada in managing risks, costs, and creating as much value as possible. A simple five-step framework is presented here:

Step 1: Market Research and Goal Setting

All acquisitions start with purpose. Do you expand geographically, access to technology, or do you want to have a more solid customer base? Market research: industry trends, competition analysis, and customer insights. These goals are refined by market research and by defining the most promising sectors of the industry.

Step 2: Building an Acquisition Strategy Plan

The acquisition strategy plan describes how to achieve the goals that have been established. This will involve establishing target company requirements (size, location, profitability, culture fit), financing sources, and alignment with the long-term strategy of the company. As opposed to the broader strategy that describes the reason why, the plan is tactical and lays down milestones, obligations, and timelines to carry out the deal.

Step 3: Due diligence

The most important step is due diligence, during which financials, legal documents, contracts, intellectual property, and operational information are analyzed. It is also here that lots of deals are made or come to pieces. In a bid to handle this process effectively and in a safe way, organizations are increasingly relying on M&A data room solutions. 

A VDR is a safe online place to share sensitive information, where both buyer and seller are assured that documents are kept safe, and at the same time, are easy to review. This may minimize risks and costs to SMEs that do not have legal teams in their organizations.

Note: Learn about VDR pricing to choose the most cost-effective software.

Step 4: Negotiation and Structuring

As due diligence is done, negotiation is initiated. This step involves deals’ pricing, payment terms, and structure (either debt-funded, equity-funded, or a combination method). Traditional bank loans secured by business assets are still popular in Canada, but other sources of finance, including private equity or programs through the government like the Business Development Bank of Canada (BDC), are gaining prominence among SMEs. The trick is to weigh the risk and the reward and to remember the future cash flow.

Step 5: Integration Planning

The process of closing the deal does not end. The most effective way to measure the success of an acquisition is to measure the effectiveness of acquiring an existing business. This incorporates coordination of IT systems, integration of company cultures, retention of key employees, and effective communication with stakeholders. Post-merger integration planning needs to commence before signing the deal so that the execution is seamless and value creation commences instantly.

Additional read: Learn also about Synergies in M&A.

Business Acquisition Strategy vs Exit Strategy

It is all about growth through an acquisition strategy. It is about finding targets that can lead to a transformational merger, increase your market reach, introduce new technologies, or empower your supply chain. For many Canadian SMEs, acquisitions represent a means of scaling their operations more quickly than an organic growth rate can provide. The acquisition of a competitor, a new province, or obtaining intellectual property can accelerate the pace of innovation.

An exit strategy, on the other hand, involves planning how the business owners will one day part ways with their company. This may involve either selling the business to a bigger player or passing on the business to the family, or even preparing the business to be publicly listed. 

Sometimes, an acquisition exit strategy is planned: a business person can develop a company with the long-term intention to be bought by a larger competitor in the market. Indicatively, most Canadian technology startups aspire to be acquired by international companies as a means of exit; in this case, acquisition is the mode of exit.

The two approaches can appear antithetical — one is growth-oriented, the other is departure-oriented; however, they tend to overlap. Owners of businesses must strategize to do both: acquire companies to create value and market presence today, and have an exit plan in mind to ensure that growth can be translated into a painless and profitable exit in the future.

Common Challenges in Building an Acquisition Strategy

Acquisitions can be hard even when there is a clear roadmap. Here are the possible pitfalls Canadian businesses can face:

• Cultural integration. When two organizations are combined, it usually entails the merging of different company cultures, management styles, and workplace expectations. Otherwise, collisions in the cultures can lead to loss of talent, inefficient productivity, and failure to integrate.
• Overvaluation and risks. The enthusiasm surrounding a prospective acquisition can result in overvaluing a target company. This is especially dangerous in sectors such as technology or energy, where the valuation can swing wildly. Overvaluation may put cash flow under strain and diminish the projected payoffs of the acquisition.
• Regulatory hurdles in Canada. Depending on the sector, the industry should be approved by regulators like the Competition Bureau or the Investment Canada Act. Compliance may be a barrier to SMEs in regulated sectors like healthcare or finance.

How Virtual Data Rooms Minimize the Risk 

Virtual data room software mitigates the risks when implemented in the due diligence and deals execution process. Centralizing sensitive documents in a secure environment with access controls eliminates the risk of data leakage, so both sides of the agreement have the same information, and communication between legal, financial, and advisory teams becomes more efficient through the use of VDRs. In the case of Canadian businesses, this can translate to quicker transactions, enhanced compliance, and a reduced number of surprises that bring the deal to a stop.

Conclusion

An acquisition strategy is an effective growth tool that can be successfully used by all businesses. Companies can approach a deal with clarity and purpose by separating the acquisition strategy, the overall M&A planning, and the exit strategies. The acquisition helps a business expand faster, including expansion to new markets, acquisition of technology, or enabling supply chains.

In the meantime, the problems of cultural absorption, overvaluation, and regulatory barriers should be treated with caution. Tools as virtual data rooms, can be incredibly effective in reducing risks, securing sensitive data, and conducting due diligence. The secret behind success in SMEs and in larger corporations is in planning, implementing it step-by-step, and never losing sight of the bigger strategic picture.

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