A company wants to speed up its growth, and gain new resources and/or assets. Going “solo” through organic growth may work but takes longer to achieve. So the company considers acquisition. It’s like constructing a new house versus buying an existing one. Buying an existing house makes you the owner overnight compared to having to wait until the new house is built.
Acquisitions are fundamentally a strategic tool. While the reasons may be plentiful, corporations use acquisitions as a strategy to grow quickly or defend against rapid changes in market dynamics. In many instances, acquisitions are an effective way to knock off an upcoming threatening competitor, increase market share, reduce financial risk, and diversify product or service offering.
When an acquisition goes bad, it usually can be attributed to the strategy being wrong to begin with, setting too high expectations, or paying too much. Timing may also render things more difficult.
Many times, however, a good strategic decision around acquisition is sabotaged by poor execution in the post-acquisition period.
But, let us stay positive and talk about my seven suggestions that could make your next acquisition a great one.
1) Purpose: Know the number one reason you are making the acquisition. Acquisitions that have one or a maximum of two specific advantages are usually more successful because there is a clear, precise added value. Acquiring a company for several reasons tends to dilute the fundamental purpose for the acquisition and may also reduce the focus. Down the line you may uncover many secondary benefits; that’s okay, but keep your focus on the main value add you want to achieve. Two examples: 1) We don’t have a presence in Western Canada. We need to offer national coverage. Period. Or 2) We have technologies A, B, and C. We need technology D going forward. Period.
2)Timing: It is important that you do your homework on timing. Wise and successful investors buy when everybody is selling and sell when everybody is buying. This is obviously easier said than done. While you cannot get it perfect every time, review the macro-economic picture. Assets valuation can greatly fluctuate with economic cycles. Take timing into account.
3) Plan for post-acquisition: Richard Cushing once said: ” Always plan ahead. It wasn’t raining when Noah built the ark.” Know in advance what you are going to do post the acquisition. Are you intending to treat the acquired company as a “stand alone” or are you going to “tuck it in”?
Many acquisitions go bad because there was no plan around what to do once you made the acquisition, whereas those with well-thought-out plans have demonstrated success. Wal-Mart entered the Canadian market in 1994 with the acquisition of 122 Canadian Woolco Stores, at the time, a troubled subsidiary of Woolworth Canada. Gradually, Wal-Mart renovated the stores and converted them to the Wal-Mart banner. All employees were retained and received a welcome raise by joining the Wal-Mart family. A senior vice-president of Woolco became CEO of Wal-Mart. This kind of plan is like a road map; it does not guarantee you get to your destination but it does show you the way there.
4) Culture compatibility: Company cultures will always be different, but understanding how apart are they from each other is an important aspect that can make the acquisition succeed or fail. Remember what Peter Drucker said: “Culture eats strategy for breakfast”. Basically, regardless of its product, no company thrives if the employees don’t embrace a communal set of values and behaviours.
Check if the cultures of the companies involved are compatible. The M&A advisors, consultants, and accountants most likely compare financial performance, assets valuation, number of customers, number of employees, etc. but they don’t always assess if the two cultures are compatible. Do your homework and find out if the two cultures can work well together.
The failed acquisition by Daimler-Benz of Chrysler in the 90s may have been caused by many factors. but I say it was mainly due to culture incompatibilities. The German culture at Benz could be described as conservative, disciplined, and structured, while the American culture at Chrysler culture was more creative and full of risk-taking. Daimler-Benz purchased Chrysler in 1998 for $36B; sold 80% in 2003 to a venture capital firm for $7.4B; and then two years later, paid money to unload their remaining 20%. Culture is real. You cannot see it or count it, but it exists and it can make a difference between success and failure.
5) Changes: Acquiring new assets, new resources, and new customers is exciting, but hold your horses and avoid making too many changes at once. I am not saying don’t make them. But make them preferably one at a time.
Introducing too many changes concurrently may confuse customers and employees. Make sure that initial changes are accepted before introducing other changes. Going too fast reduces your ability to correct, fix, adjust, regulate, and fine-tune.
6) Public or private: When acquiring public companies, the two boards must usually approve of the acquisition unless the acquisition is a hostile one (which should generally be avoided). When acquiring a private company, the decision to go ahead or not is usually made by the major shareholder, the owner, a handful of partners, or family members.
Plan ahead of time to establish first a relationship with the target company through proper “courtship,” particularly in the case of a private company. Acquiring a private company is not always money driven as in public companies, so take the time to build a rapport. Courtship can be achieved through informal meetings for breakfast or lunch, membership to industry associations, attendance to trade shows, industry events, etc.
7) Team work: Just like a soccer team, it is people that make plans work or fail and it is team work that results in successful acquisitions. You need good players in every position, and people who can work together so the team wins. You do not have a team if you merely have individual players showing off their abilities. You have a team when you weave different people together who are committed to working together and know deep inside that their success depends on team performance. And, of course, make sure the team includes people from both organizations.