B
y most measures, the majority of acquisitions do not realize their financial objectives. To improve these results, a clear focus on the objectives and value creation is a must. There have been many studies of mergers and acquisitions that unfortunately offer limited insight into
What to do!
and
Why to do it!
The fuzzy information in most of the analysis and review in this area is the result of poorly stated strategies or hidden strategies in merger and acquisition planning. Far too many transactions have cost reduction as the primary driver ... even though the explicitly stated objectives are quite different. In addition, “industry roll-ups” and “purchases of depressed assets” rarely yield the promised returns-on-investment.
A better approach is to follow the logic spelled out by Goedhart, Koller and Wessels in a 2010 article in Corporate Finance Practice
. These professionals outlined a simple reference list for use in developing and executing acquisition strategies that can and should increase business value. Specifically, they (G, K & W) argue that to create value, a planned acquisition should be solidly based one or more of the following strategies
:
Improving the performance of the target company. (This objective must be based on existing knowledge and management expertise.)
Removing excess capacity from an industry. (In the middle-market, this strategy is only operative in smaller market segments.)
Acquiring skills, products, or technology faster or at a lower cost versus internal development. (These new assets must be applied to a known market.)
Creating market access for products. (Finding new channels and customer base for existing products as part of established growth processes.)
Identifying early-stage developing companies that have a competitive edge. (This approach requires a willingness to invest in growth.)
Each transaction must have its own strategic logic. This is especially true in a disrupted economy when the future is less certain! Successful acquirers have the discipline to insist on a well-defined objective and an easily understood acquisition plan before moving ahead with any potential deal. In many cases, these experienced managers have an overall corporate development strategy based on a deep understanding of the risks and rewards of moving in the matrix, as presented in the following graphic.
The reason the best-of-the-best acquirers succeed is that they really do not see acquisitions as a growth strategy ... but rather as a tactic to achieve planned growth within the business, product, market development matrix. These experienced business managers operate as strategists who have already applied the following recipe for success to their business planning and strategic development:
- Protect existing business with operational excellence
- Penetrate further into existing markets segments with current customers
- Extend into existing market segments with existing products
- Extend into new market segments with existing products
- Extend into existing market segments with new products
- Diversify with new products in new market segments
This approach provides these owners with the solid thinking and appropriate measure of momentum needed to execute on well-developed strategic acquisitions to further long-term business goals and objectives. For example, an acquisition could provide a new product group to offer to existing customers as a value-creating acquisition strategy.
The key is that the impetus would be from planning and assessment that an acquisition (a tactical step) was the best option available. Every business owner should make an effort to replicate this merger-and-acquisition process to “increase business value”
with minimal risk
and maximum opportunity for achieving sound objectives
.
