The hard part is going out and doing what is talked about on paper and understanding the internal company resources that will have to be dedicated to achieve success. Acquisitions fail because they are distracting. Integration can be slow, and expensive. Identifying what your company will have to put in to the deal, not just what it will pay to close the deal, can be the difference between success and failure.
Acquisitions fail when the focus is exclusively on the target. Successful acquirers focus on themselves first, and the target second. Specifically, successful acquirers focus on the internal capabilities they can leverage to transform the target company. Just as successful acquirers focus on what they have to give up to for a successful deal, they also focus on the unique capabilities they can bring to the target company to render it more effective than it was as a stand-alone company.
Acquirers can add value in a number of ways. One of the more common ways is when big buys small. In this case, the larger acquirer may be able to apply the resources of a larger organization to a smaller organization. These resources may be a regional management structure, a national sales force, or a centralized purchasing department.
These resources may help the smaller company increase revenues or decrease costs, or perhaps both. Successful acquirers focus on more than just price. Identifying the core capabilities that can be applied to the target company to maximize value separate the successful acquirers from failed acquisitions. Of course, not all fragmented industries have the potential to deliver scale or scope economies—a lesson learned the hard way by the Loewen Group Alderwoods after bankruptcy.
Loewen rolled up the funeral home business to become the biggest North American player by far, but its size alone created no meaningful competitive advantage over local or regional competitors. Often they arise through the accumulation of market power. After eliminating competitors, the big players can charge higher prices for value delivered. For two of the biggest proposed deals of , however, the jury is still out.
This, too, may be easier said than done. Supersuccessful, high-end, Europe-based Daimler-Benz thought it could bring much better general management to modestly successful, midmarket, U. As long as the U. But when that sectorwide party came crashing to a halt during the global financial crisis, GE Capital nearly brought the whole of General Electric to its knees. Berkshire Hathaway has a long track record of buying companies and boosting their performance through its management oversight, but not many other convincing corporate examples exist.
Danaher may be the best one. For the system to be successful, Danaher asserts, it must improve competitive advantage in the acquired company, not just enhance financial control and organization.
And it must be followed through on, not just talked about. Despite this outstanding growth and performance, Danaher is in the process of splitting into two separate companies under the baleful eye of the activist hedge fund Third Point.
An acquirer can also materially improve the performance of an acquisition by transferring a specific—often functional—skill, asset, or capability to it directly, possibly through the redeployment of specific personnel.
The skill should be critical to competitive advantage and more highly developed in the acquirer than in the acquisition. A closer examination, however, suggests that thus far it has been a pretty expensive mistake. It was as hot as a smoking pistol and had many other potential joint venture partners. But Disney needed Pixar: Its biggest successes in animation in the previous decade were its joint-venture projects with that company.
It had little to give and lots to take—and paid an extraordinary price for the pleasure. Clearly, this method of adding value requires that the acquisition be closer to home than not.
The fourth way is for the acquirer to share, rather than transfer, a capability or an asset. With some acquisitions, it also shares a powerful brand—for example, Crest for the SpinBrush and Glide dental floss. But it had no valuable capability to share when it bought the handset business from Nokia. And even if Time Warner had limited itself to giving AOL preferential treatment, the other market players might well have retaliated by boycotting its content.
This was not like the acquisition of Oculus, in which Facebook conferred singular status on one of a number of virtual reality contenders. WhatsApp was already by far the leader in global messaging, with million users, when Facebook decided to acquire it. It is, of course, a monumentally successful company.
It could have combined WhatsApp and its own application, Messenger, but it has kept them completely separate. It seems to be based on a fact and a prayer. This means they may be extremely under-diversified. Their solution? Diversify the firm, even if that's not in the interest for the other shareholders who may more easily and inexpensively diversify themselves by holding shares in other firms.
There's another agency problem that is often overlooked, and that is the agency of the investment banker putting the deal together. All deals are good deals to a banker who is going to receive a fee for putting it together.
That's something we could and should fix, but that's a topic for another article. Sometimes a deal has some major sources of potential value. Perhaps manufacturing could be consolidated, enabling the firm to shutter some plants and increase capacity utilization. Perhaps bringing multiple product lines under a single brand could lead to major advertising benefits or savings.
However, to achieve these sources of value often requires major integration of the firms. That can include painful choices. Whose plants get shut down?
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