Not for the Big Guys Only

Feb 01, 2005 10:30 PM  By

Much of the notable acquisition activity in the direct marketing industry in recent years has involved the larger players. Last year alone saw conglomerate Taylor Corp. buy business products marketer Executive Greetings and consumer stationery title Colorful Images; Deluxe Corp. acquire multititle mailer New England Business Service; Harry and David parent company Bear Creek Corp. purchased by investment fund Wasserstein & Co.; medical supplier Moore Medical Corp. bought by healthcare provider McKesson Corp.; and private equity firm Golden Gate Capital partner with a management-led holding company to buy Spiegel Catalog and Newport News, to name just a few deals. But this year it’s likely that more smaller players will take part in mergers and acquisitions as well.

Significant increases in the cost of technology, paper, delivery, and customer service have nibbled away at the profitability of even the best-run companies. It was these escalating operating expenses that prompted a number of the larger players to merge, acquire, or be acquired in order to retain their competitive edge — or in a few cases, to remain viable.

Small and midsize companies, of course, are hardly immune to such cost increases and their effect on the bottom line. And making matters worse, the limits in operating capital available to these smaller businesses challenge their ability to attain greater cost efficiencies and extend their market reach.

To guarantee their survival and maintain a competitive presence in the industry, a number of these companies may have to consider growing themselves into economies of scale, acquiring or merging with a related or complementary business, or making themselves an attractive acquisition target.

The first option, attaining greater economies of scale via organic growth, is not a realistic proposition for many — perhaps most — direct marketing companies. This is an especially difficult challenge for those with a niche focus, inasmuch as their markets are limited by definition. Even for those companies with relatively broad market potential, the capital required to boost growth may be exceptionally difficult to access.

But the second and third options are viable indeed. Many small and midsize companies can achieve greater economies and protect their value by pursuing acquisitions or positioning themselves to become an acquisition target.

Questions for a prospective acquirer

Once a company has resolved that the most practical strategy for survival is to acquire one or more entities, its management needs to address numerous questions:

  • Will the acquisition target provide worthwhile economies of scale or result in meaningfully greater market penetration or market expansion?
  • Is it clear that the acquirer will be able to retain a high proportion of the acquired company’s client base?
  • Does the acquirer have in place a sufficiently strong management team — or a management team with prior acquisition experience — to successfully carry out the integration of the acquired company?
  • Is the acquiring company willing to objectively evaluate the acquired company’s management and staff against its own in-place people? In effect, is the acquirer prepared to eliminate employee redundancies from both companies?
  • Has the management of the acquiring company thoroughly evaluated both the costs and the feasibility for integrating multiple technology platforms as a result of the merger?
  • What are the significant changes that the acquiring company will need to make in its organization’s structure, technology, staff, and culture to successfully integrate the new entity or entities?
  • What risks and consequences will the acquiring company face if the acquisition does not produce the projected savings or revenue increase?
  • Before initiating negotiations, has the acquiring company identified an investment bank that can help facilitate the process? The bank should know the business and have expertise in the sector in which the company operates; it should also have proven access to investment capital sources and experience in assisting small and midsize companies.

Strategies for acquisition candidates

In the direct marketing industry, two of the more valuable assets a company looks for in an acquisition are 1) the target company’s customer list and its potential to help gain additional clients and cross-sell opportunities, and 2) viable product lines and brands. Therefore, a company that seeks to become an acquisition target should consider the following five steps to make itself attractive to potential buyers:

Keep the customer database clean and updated

This provides potential buyers with the confidence that the circulation and mailing programs they will acquire are workable. As a rule, the value of a database diminishes significantly when it is not updated and includes old addresses and incomplete phone and fax numbers. Prospective buyers can track the mailing list for results to easily determine if a company has ceased to invest in updating its database.

Continue prospecting

A common mistake of companies that are seeking to be bought is to reduce prospecting in order to cut costs. But to become a more attractive candidate for acquisition, a company should concentrate its efforts not just on maintaining the names in the database but also on seeking ways to increase the house file’s size. Potential acquirers will often compare a three-year-old client file with a one-year-old file to assess how much the database may have deteriorated.

Evaluate strength and cost-effectiveness of the product lines

Many companies tend to grow attached to their merchandise lines and often fail to understand that retaining unprofitable products is a dangerous and costly decision that helps reduce the valuation of a business. Sophisticated acquirers usually do not focus on the number of products a company provides but rather seek to buy a company that has the highest possible number of active buyers in its database. In general, an entity that has a relatively limited number of products but also has sustained customer activity is more attractive to acquirers than one with a broad product line but only sporadic activity.

Invest in and preserve your brand

A recognizable brand that targets an identifiable customer base is a key characteristic that a potential buyer looks for in a direct marketing company. Niche-market companies that seek to attract buyers, then, should continue to maintain or boost their brands through sustained marketing efforts. Allowing your brand to drift may save marketing dollars in the short term but will lower the value of the entire company in the long term.

Don’t overlook the importance of technology compatibility

Taking steps to increase the adaptability of an existing customized or proprietary technological system so that it could easily be transitioned onto an acquiring company’s system requires a significant investment of financial and human resources. Nonetheless, a highly scalable and relatively open system often increases the value of a company and attracts a larger number of potential buyers.


Allyson DeMatteo is managing director and Christopher Walsh is vice president of SSG Capital Advisors, an investment bank based in West Conshohocken, PA.