Growth can occur in two fundamental ways: a company can either grow organically or through acquisition.
Industry experts are quick to cite that the impulse to buy other businesses can be a sign of management weakness, that corporate cultures often clash, and that the majority of acquisitions simply fail. Why then do we read about record breaking acquisitions such as between Dell/EMC, Facebook/WhastApp, and JAB Holding Company/Keurig Green Mountain, to name a few?
A closer look at the world’s most successful firms reveals one fundamental reality– they continue to rely on acquisition to achieve their strategic goals. Managers reiterate that acquisitions are a more effective and efficient way to achieve targets versus organic expansion.
Achieving success post acquisition starts before the acquisition. Ideally, there needs to be an obvious strategic fit between the two companies. Secondly, a degree of organizational fit needs to be present, unless the parent company wishes to establish a completely new corporate entity after the acquisition. Sufficient degrees of strategic and organizational fit ought to guarantee an acquisition’s success.
The challenge therefore is to determine what constitutes a successful acquisition and how to spot potential early on. These six qualities will serve as a handy guideline.
1. Trim the fat During an acquisition, each company will have an opportunity to share best practices. It is at these seams where great efficiencies are to be had. This in turn can result in each company enjoying higher profit margins once inefficiencies are identified and removed. Consolidation can lead to greater sales and production capacities for both firms. In 2006, Adidas acquired Reebok in a US$3.1 billion deal. The merger was aimed at helping Adidas increase its share in the U.S. market and better compete with market leader Nike Inc. and fourth ranked Puma AG.
2. Piggybacking Small companies often enjoy the benefits of inherent lean thinking coupled with an innate desire to innovate. Large companies, by their very size, are generally stifled by bureaucracy, petty politics, and entrenched systemic inefficiencies. Given a progressive board, acquiring small companies can help improve the culture of the parent company and accelerate revenue growth. The challenge is to identify where the synergies for growth are. Small companies can benefit from the larger company’s existing presence and influence in the market to greatly amplify their product or service offering to a broader client base. When Coca-Cola bought Odwalla in 2001, it enabled Coca-Cola to adapt to changing consumer tastes leading to brands like Vitamin Water and Zico Coconut Water to be acquired.
3. People, pipelines, and IP An acquisition can lead to an increase in specialized skills, industry knowledge, sales pipelines, and patented technology. Technology is especially an attractive acquisition target– think Siri for Apple. The time it would take to develop a suitable alternative technology might preclude you from benefiting from the market trends. The acquisition cost can therefore be marginal compared to the competitive advantage it brings. Developing deep rooted customer relationships can take considerable time. Provided those relationships are linked to the company and not individual employees an acquisition can fast track additional sales pipelines. In 2008, HP did exactly this when it acquired EDS, adding services focused features to their technology offerings.
Related: Selling Your Business: Developing An Exit Strategy For Your SME
4. Show them the ropes A popular model amongst private equity firms is to identify high growth potential companies that will yield a rapid increase in operating profit margin with a few basic strategies. This form of value creation is particularly poignant when the target firm has a similar structure to your own. That way it is easier to implement proven strategies that will reduce costs thereby improving margins and cash flows. A dual strategy of cost cutting coupled with revenue growth can be pursued. In this instance, it’s important that wasteful activities be curtailed and funds allocated to revenue generating segments of the business. JAB Holding Company succeeds in doing this with its focus on FMCG and lifestyle product portfolio.
5. Industry tipping point Size can sometimes matter, and when an acquisition results in establishing market dominance numerous benefits can occur. Customers can service more of their needs with a single supplier leading to what is commonly referred to as the cumulative effect of building brand value. You are better placed to negotiate on your terms owing to the buying power you will have. Buy-side and supply-side benefits are therefore real and cumulative. Sirius Satellite Radio joined forces with rival XM Satellite Radio and now enjoys market dominance.
6. Early bird catches the worm In an era of billion dollar unicorns, companies are increasingly hoping to uncover the next industry disruptor before their competitor’s do. As with Venture Capital the strike rate can be depressingly low yet the right discovery will more than make up for any losses along the way. Management will need to have a keen appetite for calculated risk and the patience to play the cash flow sapping waiting game until their acquisition shows its flamboyant colours. As with most industry disruptors, the roadmap to success is generally quite vague adding to the importance of a visionary board capable of growing the investment to full potential. No one does this better than GV, formerly known as Google Ventures. They are exceptional at spotting real potential early on with investments in over 300 companies to date. This list includes Uber, Editas Medicine, and HubSpot to name a few
Regardless of the benefits associated with an acquisition; it’s imperative to ensure that the acquisition is in line with your company’s overall long term growth strategy. To this end management need to keep a clear eye on potential acquisition targets as competitors will be doing the same. The ideal end state is to have a pipeline of acquisition targets to ensure continuous momentum and growth.