Acquisition – Strategies that Work

Acquisition – Strategies that Work

July 30th, 2018 // 1:04 pm @

The majority of Acquisitions do not with hindsight reach the goals set for them, and the first stage in a successful acquisition is to have a sound strategic logic, vague objectives such as “International Scale” or “Market Share” do not normally lead to a successful acquisition.

Good strategical cases for acquisitions include:

Improving the Performance of the acquired company – Simply this is the belief that you can improve the financial performance of the company being acquired simply through more rigorous management. A good example is H.J.Heinz acquired by 3G capital and Berkshire Hathaway, since which time revenues at Heinz have been flat, but 3G have significantly cut costs improving margin and business value. Such acquisition logic normally works best with cost reduction rather than a belief the acquirer can increase revenue. Cost savings are easier to quantify pre acquisition than potential revenue growth.

Consolidation and the removal of excess capacity – Most production facilities only work truly efficiently when working their assets close to capacity. Therefore any industry with over supply will tend to force prices down, and make competitors run their plants below capacity and therefore inefficiently. In this scenario taking out excess supply by acquisition, and plant closures can drive profitability, however it is critical to fully understand the nature of the benefits and costs from taking out another player, to ensure you do not over pay.

Market Access – This logic can work in two ways. Firstly it can be a strategic necessity to own a local player in order to access certain markets, such as China and many in the Middle East, these local partners are often required by local law, but rarely do much for the business beyond meeting such local laws. Secondly there is the logic that acquiring small companies with good products and if the acquiring company has the sales reach to offer these products to a wider market, this can make clear commercial logic.

Acquiring technologies or patents – In this fast moving world it can often be more cost effective to buy innovative technology or patents. This can be seen clearly amongst technology companies who actively seek out small companies with innovative technologies, then bring them to a wider market. This also has the advantage of taking out potential future competitors at an early and relatively inexpensive stage. This strategy is also much in evidence at the moment in the pharmaceutical world where the costs, risk and timelines of researching a new drug are high, the acquisition of in patent drugs can be seen as a safer and more predictable investment.

Scalability specific to your industry – Some industries profitability is strongly driven by scale, and acquisitions that drive scale can be good acquisitions. Car manufacturers have understood that particularly in recent decades and have acquired brands, and then spread the costs of development across these brands. Volkswagen has been most successful with mass-market brands including Audi, Volkswagen and Skoda all sharing significant under the skin technology. The success of such acquisition is reliant on effective and rigorous implementation. GM bought SAAB with the intention of basing future SABB cars on GM underpinnings, however GM failed to get SAAB to use GM parts and SAAB were allowed to continue developing their own cars which was expensive and led directly to SAAB’s failure.

Acquire Early stage winners – Simply put this means picking who you think will be a winner early in its development and acquiring it cheaply, and using your resources to accelerate its development into a successful company. This strategy is based on commercial judgment but can also be linked to other strategies such as giving the acquired company access to a bigger market through your sales operation

Having a realistic and specific strategy for your acquisition is critical, as is not allowing ego to drive the acquisition, or more importantly the price. Every acquisition must have a “Walk away price”, the number at which it no longer makes sense to acquire. Such limits are rarely set and even more rarely stuck too.

 

 

 

 


Category : Blog &Business Strategy

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