The Heinz-Kraft 'tip of iceberg' warning for vulnerable companies

The key driver is changing eating habits and consumption behaviour in many countries, resulting in reduced sales and over-capacity, a trigger for more of the same, in all flat-lining categories... These consumption-changes combined with structural changes in how we shop, and austerity driving consumers to 'make do' have brought Warren Buffet and his new lesser-known Heinz-Kraft partner Jorge Lemann to the M&A centre-stage to provide growth and/or add value to ailing companies...

How the targeting-process works (types of targets)

• Identification of categories under threat from changing trends i.e. growing health awareness causing drops in consumption/switching
• Acquisition of competitor for increased revenue or market share
• Complementary coverage in terms of brands, categories, channels and geographies i.e. scale economies, negotiating muscle up and down supply-chain
• Potential synergies where Production, Finance, Marketing and Sales can be combined/replaced
• Short-cut into innovation and diversification

Finding target companies

• Search for categories where shares are 'cheap' i.e. low and falling ROCEs, that 'can be bettered'.....
• Falling sales when other categories are flat-lining
• Identification of companies that have lower net margins resulting from inefficiencies and/or cumbersome structures (from an outsiders point-of-view)

Objectives
The acquirer needs to correct 'faults' that defined the target, fast, to minimise dilution of the combined organisations and convince shareholders of the 'wisdom' of the move.

This means

• Increasing sales and cutting costs
• 'De-duplicating' Fixed Assets i.e. Land, Buildings, Plant and Equipment ('they don't need two of anything')
• Reduce stocks, debtors (credit to customers) and optimise cash
• Increase creditor-days i.e. take longer to pay
• 'De-duplicating' job-roles
• Anticipate demands of the regulators re competition legislation
• Selling off anything that 'does not fit'

In other words, drive ROCE upwards to match that of the acquiring company

Action for NAMs

• For NAMs in target and acquirer companies, check through the above (and see more here) to anticipate the inevitable moves...
• For NAMs in other companies in category, re-assess the new competitive landscape (See Buying Mix Analysis)
• For all other NAMs, find ways of driving ROCE (your personal contribution, your company's and the customers' ROCE) to ensure autonomy, and become too expensive to buy i.e. so that the above synergies are not worth the cost for potential acquirers

All else is detail