Growth By Acquisition – An Introduction

Mergers and acquisitions can be effective tools to speed the growth and development of your company.  Through acquisitions your business can expand into new geographic areas, enter new market spaces, broaden product lines, develop relationships with new and growing customers, and bring in new and useful technologies.  And, yes, acquisitions can be used to buy out pesky competitors, thus eliminating them from “screwing up” your market.

So, what are the basics of growing by mergers and acquisitions?

 

First, realize that all acquisitions are risky and difficult.

Countless surveys estimate the success rate on acquisitions at less than 50%.  By paying in cash or stock upfront, acquisitions are big, bold bets on the future that often do not pan out and can fail spectacularly.  Further, acquisition integration is hard.  Bringing together two different corporate cultures and two diverse ways of doing business takes a lot of management time and effort that can distract the leader from the rest of the business.  To reduce this risk, you need to be sure that you have the strong leadership team in place to undertake the acquisition and integrate the acquired business.

Second, acquire a company for the right reason.

Acquisitions, like initiatives, are sometimes used to mask the weakness in accountability and execution in the current business.  If you are not currently successful or growing, do not consider acquisitions as a viable strategy to help save your company from its current under-performance.  Fix your own business first.

Third, ensure that the acquisition fits with your business development goals like a glove.

As such, the acquisition has to bring something unique and useful: strong relations with additional customers in your market space, new products or production technologies for your market space, or a strong presence in a closely related and growing market space.  In general, it is best to pay a little more and buy a strong, viable, even dominant, business.

Finally, if you want to consider acquisitions, then have an acquisition strategy.

Target the companies that you would like to acquire over the next one to three years and begin to make contacts and build relationships now.  This will ensure that your company will be the one getting the call when the target decides to sell.  In the best case, you may be able to negotiate with the target directly without other potential buyers being involved.

The most successful acquisitions that my team completed had been on our acquisition target list for years.  In one typical case, we targeted the company starting in 1998, looked to do a joint venture with them in 1999, continued to keep in touch over the intervening years, and finally acquired them in late 2002.  When the time came, they reached out to us, and we were ready to move quickly.  It is true that they had also considered other potential buyers; but there was no auction or bidding war so we got the deal done at the right price.

Yes, the opportunistic deal may fall in your company’s lap.  But, it is far more likely that if you do not develop relationships with prospective acquisition targets that a competitor or Private Equity buyer will contact the target at the right time.  The company will then either sell without your knowledge, or the company will put itself up for auction requiring you to pay top dollar.

Summary

While not the easy solution to slow or no growth, acquiring another company (or competitor) is often a viable (and sexy) part of many companies’ long-term growth strategies.  Proceed cautiously.

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About David Shedd

David has eleven years of experience as President of an up to $350M group of manufacturing, distribution, retail and services companies, having led 20 different businesses from turnarounds to start-ups to fast growth companies.
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