Strategic Buying

When a company wants to speed up its growth, gain new resources and assets, going it “solo” through organic growth may work, but it definitely takes longer to achieve.

That’s when an acquisition can help. It's like building 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.

Be Strategic

Acquisitions are fundamentally a strategic tool. While the reasons may be many, 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 offerings.

When an acquisition goes bad, it usually can be attributed to the strategy being wrong to begin with, setting expectations too high, or paying too much. Timing may also render things more difficult. Many times, however, a good strategic decision based on acquisition is sabotaged by poor execution in the post-acquisition period.

Here are seven suggestions designed to smooth the acquisition process:

1. Know the No. 1 reason you are making the acquisition. Deals that have one or maximum two specific reasons for acquisition are usually more successful because there is a clear, precise concept.

Acquiring a company for several reasons tends to dilute the fundamental purpose of the acquisition and may also reduce focus. Down the line you may uncover many secondary benefits, and that's OK; but keeping your focus on the main value will more often give you what you want to achieve.

One example is a company that doesn’t have a presence in a certain geographic area and an acquisition will enable that to happen. A singular reason leads to a simple, reasonable acquisition.

2. Do your homework on timing. Wise and successful investors buy when everybody is selling and sell when everybody is buying. However, this usually is easier said than done. While you cannot get it perfect every time, reviewing the macro-economic picture will yield better results because asset valuation can fluctuate with economic cycles.

3. Plan for the post-acquisition phase. You should know in advance what you are going to do after the acquisition. Do you intend to treat the acquired company as a stand-alone business, or are you going to absorb it into the existing company?

Many acquisitions go bad because the acquirer had no plan of what to do once it made the purchase. Conversely, those with well-thought-out plans have demonstrated success. Walmart entered the Canadian market in 1994 with the acquisition of 122 Canadian Woolco stores which, at the time was a troubled subsidiary of Woolworth Canada. Gradually Walmart renovated the stores and converted them to the Walmart banner. All employees were retained and received a welcome raise by joining the Walmart family, and a senior vice president of Woolco became CEO. 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. Look for culture compatibility. Company cultures will always be different, but understanding how apart they are from each other is an important aspect that can make the acquisition succeed or fail. Management consultant and author Peter Drucker said, “Culture eats strategy for breakfast.” Basically he’s saying that, regardless of its product, no company thrives if the employees don't embrace a communal set of values and behaviours.

Remember, many merger and acquisition advisers, consultants, and accountants will compare financial performance, assets valuation, customers, and number of employees, 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.

Daimler-Benz’ failed acquisition of Chrysler in the ’90s may have been caused by many factors, but 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 was more creative and full of risk-taking.

Daimler-Benz purchased Chrysler in 1998 for $36 billion, then sold off 80 per cent in 2003 for $7.4 billion, before unloading the remaining 20 per cent two years later. Culture is real. You cannot see it or count it, but it exists, and it can make a difference between success and failure.

5. Avoid quick changes. Acquiring new assets, resources, and customers is exciting, but avoid making too many changes at once. Make changes one at a time. Introducing too many changes concurrently may confuse customers and employees. Make sure that initial changes are accepted before introducing others. Going too fast reduces your ability to correct, fix, adjust, regulate, and fine-tune.

6. Establish a relationship. When a public company is acquired, the two boards must usually approve of the acquisition unless it is a hostile takeover (which generally should be avoided). For acquiring a private company, the decision whether to proceed usually made by the major shareholder, the owner, a handful of partners, or family members.

Plan ahead first to establish a relationship with the target company through proper “courtship,” particularly in the case of a private company. Acquiring a private company is not always as money-driven as acquiring a public company, so take the time to build a rapport. Courtship can be achieved through informal meetings for breakfast or lunch, membership to industry associations, and attendance at tradeshows and industry events.

7. Use teamwork. It is people who cause plans to work or fail, and it is good teamwork that results in a successful acquisition. You need the right people in the right positions to make the acquisition work. You have a team when you weave different people together who are committed to work together and know deep inside that their success depends on team performance. And, of course, make sure the team includes people from both organizations.