Making Acquisitions Good For Growth

Favourite routes to corporate development are, undoubtedly, mergers and acquisitions, joint ventures and alliances, with organic development also being an area of focus. But what are the key factors in determining whether acquisition, amongst all the options, is the most appropriate path to take?

Whilst managers are eager for profitable growth they may also be desperately anxious that aggressive thrusting for growth especially by acquisition, may destroy shareholder value. For example, when BMW acquired Rover in the 1990s it perhaps got carried away by acquisition enthusiasm. Its consideration of £800 m turned out to be merely the deposit as it went on to invest £3 billion to develop this business. This did not work out, and by 1999 Rover had lost around £900 m. BMW exited its investment – just in time to save its independence.

So how do acquisitions fit into any growth strategy?

Figure 1


In Figure 1 we see the three major routes to growth as being:

• Alliances
  
  
• Organic development
  
  
• Acquisitions

It is important to consider which is the default option of a particular company, in order to consider other growth options and especially where acquisitions fit in.

For instance, alliances can subsequently result in acquisition, development or withdrawal (divestment). Equally, acquisition can lead to further organic development or selective disposal, or to restructuring. Strategies for growth ought to be very much a “mix and match” process with acquisitions having a very clear role, and a very clear logic. Above all, the management team needs to ask:

• What do we want to achieve through our strategy?
  
  
• What strategic options are available, and which adds most/least shareholder value?
  
  
• Who should we have an alliance or acquisition with?

On balance, research suggests that acquisitions tend to destroy rather than add to shareholder value (Grundy, 2003). It is invariably an uphill battle to generate shareholder value through acquisition, as any company that is strong and/or has lots of potential will typically be prohibitively expensive. Also, the buyer is likely to have far more imperfect information than the seller, making it much easier (generally) to extract shareholder value via divestment, rather than by acquisition. Sadly, in general terms (except in a forced sale) divestment tends to generate superior shareholder value.

In terms of acquisition opportunities and strategy the following questions should be asked:

• If we do this acquisition, what further opportunities will this lead to, and what opportunities will it forego?
  
  
• Couldn’t we do a joint venture with this company and get more or less the same as we could as by acquiring it?
  
  
• If we did an alliance with this company, could we use this as a spring-board for acquisition later?

The acquisition process - key stages

Figure 2


A very useful process for managing acquisitions strategically is shown in Figure 2. This identifies a number of key stages:

• Strategy and objectives: Unless an acquirer is very clear about its current strategic position and intent then the acquisition may have spurious fit to the acquirer’s goals. The question should thus be asked “why are we wanting to acquire, and why this business in particular”?
  
  
• Valuation/evaluation: The financial evaluation depends upon “V1” – the value interest in the existing business strategy of the target; “V2” the value gained/potentially destroyed during the deal itself; “V3” the value added, or destroyed during integration.
  
  
• Search: Unless very clear criteria are set for screening acquisition targets (“strategic dos and don'ts”) then the search process will be unfocused and mis-directed. These “strategic dos and don’ts” might, for instance include “we will rebrand the acquired company” or “we won’t acquire a business whose management is not strong”.
  
  
• The deal: Although this is a crucial part of the process it is only one of the stages when things can go right or wrong. Also, during the deal-making process the strategic assumptions coming out of the first two stages will need extensive checking out. Here you need to be more objective about what value is being created from a particular situation and deal structure.
  
  
• Integration: During the post-acquisition phase any changes to management, operations and strategy are implemented and there is further development via new opportunities or harvesting synergies. Here there may be a need to implement cost reduction, evaluate price increases, and perhaps systems integration and changes to the management and organisational structure.
  
  
• Investment and learning: During this phase the team will need to review whether the acquisition has delivered what was expected after their investment - strategically, financially and organisationally. They should also view the effectiveness of the integration process: did it go smoothly and was it in time? Also, what were the surprises and how could future acquisition be better appraised and negotiated?

A closer look at some of these key stages

In Strategy and Objectives the acquirer must first of all have a clear understanding of its own strategic position and competencies and abilities to generate economic value. It should then perform an analysis of how it expects to add value to any prospective acquisition for example, is it going to be through:

• Product/market innovation
  
  
• Absorption of operations
  
  
• Taking their products to new geographic markets/distribution channels
  
  
• Gaining economies of scale
  
  
• Injecting better management
  
  
• Commercial input – keener pricing, lower capital, lower costs.

In other words: ‘What are you really good at?’

In Search, a tendency exists to think that this involves ringing around acquisition brokers to see what’s available to buy. But if you don’t already know the company yourself, what is the chance that you will genuinely add value to it? Perhaps little. Often, a more productive and safe route is to perform your own market/competitive analysis of potential targets.

In The deal, you need to think through very carefully how to optimise the competitive forces in the deal in your favour. These comprise of:

• Your pressure to do a deal
  
  
• The vendor’s pressure to do a deal
  
  
• How many other options you have
  
  
• How many other options the vendor has
  
  
• Competitive rivalry to buy the company

A useful trick here is to practise the “Out-of-Body” experience – imagine you are the vendor, or a competing purchaser – what tactics will they use, and what is on their agendas? Above all, avoid over-paying and establish a walk-away price.

In Integration, it is crucial to identify who is project managing its implementation. The acquisition integrator must have had some involvement in earlier stages - otherwise ownership is doubtful. Prior to completion of the deal, you must have a detailed implementation plan which should be put in place quickly. Do not have a “wait-and-see” approach.

In summary, key questions you should ask yourself before embarking on any acquisition are: What is our prior acquisition experience? When this has not been so successful why was that the case and how can we avoid these problems in the future? Where we have relatively little experience how can we acquire it? For example, training and development, books, coaching, recruitment. Have we considered other options including organic development and alliances? What are our acquisition criteria, and how flexible are we prepared to be with these? What financial parameters and objectives do we wish to set including size, profitability, economic value added? Do we understand its markets and competitive change and competitive position, its value and cost drivers, and future discontinuities? Are we skilled in deal making? What are the downsides? Who will project manage integration? How are we going to manage any changes in structure and staff especially at senior level? What is the culture fit really likely to be? What milestones will be established for the integration? Why do we want to buy it, anyway?

To conclude, whilst acquisitions may seem to be an intimidating and risky route to growth, provided that you follow a sound process and already have or can achieve acquisition management skills, this can be a value adding route.

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