The much quoted Greek Philosopher, Heraclitus, stated that “the only thing that is constant is change”, with the implication that through its very inevitability, change should be accepted and embraced. As I look back on my 43 year career in horticulture, his words certainly ring true. Many companies whose names were prominent in the infancy of my career have disappeared. Some of these have been replaced by new start up organisations, and some have been absorbed by other businesses. What is invariably true, is that businesses surviving the longest have changed and adapted to do so. As I contemplate the past it is clear that this speed of change is increasing and in recent years we have seen merger and acquisition activity in our sector. This is of course normal and positive in a free market economy. Dynamics of our economy will always present opportunities for companies to expand and grow and grow we must to avoid a stagnant and difficult future. So how can we grow a business safely, whilst avoiding the risks and pitfalls and maximising real opportunities for change?
Perhaps the method most common to our sector is to grow ‘organically’. In a business context, organic growth refers to the growth that a company can achieve by increasing sales and output. Now of course this must be done profitably. If organic growth is desired then yes sales will need to grow but at the right margin, and major costs such as wages and other key inputs need to be controlled. I would refer anyone interested in perusing organic growth to look at my previous articles but here I will focus on two other methods of growth available to businesses in our sector, those of ‘mergers’ and ‘acquisitions’.
A merger is simply a voluntary amalgamation of two companies on broadly equal terms into one new legal entity. The original companies cease to exist in a legal form and a new company is formed. This is notably different from a ‘joint venture’ (JV), in which a new company may be set up by several parties still retaining their existing companies purely to pursue a specific project or venture.
Mergers obviously provide ‘instant growth’. They are often undertaken to create a company with increased skill, experience, and resources, and one which quickly improves performance. It should result in reduced costs, increased market penetration, diversification (typically merged companies offer a greater range of products or services), and the pooling of skills and knowledge. When two competitors merge this is referred to as horizontal integration but when a supplier and customer merge this is referred to as vertical integration.
An Acquisition however differs from a merger in that the two businesses coming together generally are not of equal value or size. Whereas a merger creates a new company of two ‘equals’ an acquisition involves one company taking over or buying another. From a legal point of view, the company purchased ceases to exist.
In landscaping horizontal integration normally involves the acquisition of or merger with a local competitor, although it may also involve an operator expanding to purchase another company in a different region. As with mergers horizontal integration provides the opportunity to grow sales whilst reducing and sharing costs and exploiting expertise. Whilst common in the retail sector it is less common in landscaping. Horizontal integration can also involve exploiting a company’s core competencies – what they are good at. So, for example a landscaper might be good at installing water features and might decide to exploit this core competency further by buying a specialist water feature installation company.
Vertical integration allows a business to grow in a different way by expanding into other areas in the supply chain. In simple terms this could mean a landscaqper purchasing a production nursery, a production nursery purchasing a transport company or a landscape company purchasing a tool hire company. As with horizontal integration savings can be made, for example those of transport costs, and when efficiencies are made in order turnaround time. Vertical integration can also reduce risks by enabling a company to take control of more stages in the ‘order to delivery’ process. Third parties are no longer relied upon to fulfil aspects of the supply chain, giving a greater degree of security and peace of mind. Whilst vertical integration might look attractive, it may be better to focus on what you do best and to allow others to focus on what they do best. Chances are that they have developed economies of scale and should know what they are doing. As management writer Tom Peters said, there are times you should “stick to the knitting” – in other words, stick to what you know and do best!
So, what should you consider should a merger or acquisition opportunity present? Obviously, the considerations will be many and varied, but the three key ones are generally
- Financial compatibility. Get to know your company and the other company’s finances as well as you can. Can you manage to take on any debts or shortfalls?
- Cultural Compatibility. Do both companies share the same private and public ethics and values?
- Staffing/Resource Compatibility. What will happen where resources are duplicated? How if necessary, will staff numbers be reduced?
Naturally in a dynamic market many opportunities will be available for a business owner to grow their business through horizontal or vertical integration. Mergers and acquisitions can however be expensive and time consuming to achieve, eroding the anticipated financial benefits of the move, and I would certainly only consider them seriously if you have your own house in order and have taken professional advice.
Neville Stein MBA
Horticultural Business Consultant
Tel: 0044 7778 005105
Email: info@nevillestein.com
www.nevillestein.com