In the search for the superb acquisition, the first cardinal rule to ensure success is to begin with a focused target strategy. The acquisition opportunities that buyers stumble upon in the course of their normal business are unlikely to be the big acquisition successes of any business career. Not surprisingly, we need to have a clear concept of where we want to go to wind up in the right place.
The success of an acquisition is determined not at closing, but only years later, after it has proven to add value and power to the combined entity. Regardless of the price paid or the prestige of the combination, if the results don't enhance overall performance post-closing, the acquisition was not a win.
The early acquisition process must begin with a definition of desired outcome. “Strategy first” may be the single most important safeguard for any corporate acquisition process.
Seek strengths you will need
In defining desirable acquisitions, seek first to fill in those areas where you expect to need continued and growing strength in the future. If you see your business evolving in a slightly different direction five years from now, targeting acquisitions toward such change may be an effective way to accelerate the shift. You may, in effect, buy a several-year shortcut in the development of new talents and new products.
As you view potential sellers keep in mind that some may be tripping over problems that you could very easily solve. If such problems have, for the seller, been chronic, they probably have reduced the market value of the target. In situations where you know how to solve these problems, the potential timeline for improved financial performance may be short.
In the search for troubled companies, always favor difficulties that mesh well with your own internal areas of strength.
“Fit” over “price”
In contemplating acquisitions, the choices between candidates are seldom apples to apples. The alternatives are often more difficult — with each candidate having a unique set of strengths and weaknesses. Often one candidate would clearly be an ideal fit to long-term strategic preference, but another may be far and away the leading opportunity from a pricing view. Invariably, the wise strategist will choose fit over price. Fill the strategy and capability needs first, and value will follow.
Understand, however, that there must be very real and very clear limits to this fundamental precept. You can pay 20 percent or even 25 percent “too much” for the perfect acquisition and quickly make up for the overpayment by enhanced synergy. You cannot pay two or three times too much and recover similarly.
In the heyday of the 1990s acquisition binge, we often saw one buyer offer double or even triple the median price for a deal. Many such acquisitions even succeeded modestly, in spite of their extravagance, thanks to the support of a booming economy. Buyers today are likely to wait a bit longer for the upturn, and that longer timeline can quickly erode financial cushions.
However, do not become so eager that there is no limit. Great synergy is worth a lot, but in a tight economy the risk of slower payback is real, and must be factored in.
Buy 1-3 years forward
As you contemplate the acquisition candidate, try to look forward to your own needs and expected positioning one to three years in the future. The great acquisition fit may not be the one to solve the problem you have been working on in the past. That problem may go away due to changes in technology, competitive shifts, or even your own internal countermeasures that have been slow to take effect.
Try always to think ahead as you acquire. Almost any acquisition you make will take at least a year to “digest.” It takes time to calm and stabilize people, to comfort and secure customers, and to coach new teams to begin cross-selling effectively. Thus, the prime time to make headway with the new business combination begins actually about a year after the acquisition. Plan accordingly.
Some of the most disastrous business combinations of all have come from long-standing cultural disparities. Cultural fit is awkward to define, but is actually fairly easy to see. Ask senior management to define the major strengths of the company. Ask what makes them better than their competition. If one organization has state-of-the-art facilities and highly polished offices, and takes enormous pride in its image, while another seeks only modest amenities but has a superb work ethic and great pride in saving unnecessary expenses, the two cultures are likely to butt heads. Often that type of disparity sorts itself out naturally — but not always.
Sometimes the high-end, well-funded buyer sees the conservative but highly profitable seller as a good addition, both because of its strong financial performance and because the buyer thinks that frugality is a good influence on the combined operations overall. While tighter measurements of performance and greater care in spending might in fact be prudent and worth nurturing, those values will not likely spread naturally by combining two such entities. Blending disparate cultures inevitably takes great work from within both entities.
Recent downturns easier to reverse
In targeting turnaround opportunities, always look to history to ascertain the steepness of the downhill curve. The company that was strong in recent times often has great potential to recover quickly. The smart seller takes action to sell within a few years of seeing his problem. The longtime owner who can't quite face the problem may not accept the need to consider a sale for many years. By then it may be too late.
The company with steady drops for five years may still be worth purchasing for its assets, for some proprietary capability, or for a few great key people. However, buyers must realize that recovery to the seller's old glory position will not likely happen.
Many excellent acquisitions can be made by picking up fragmented segments of a larger entity. Often the segment may be picked up with minimal commitment for facilities or for long-term staff. Those segments can make excellent value buys.
Hire outside help
Many strategic corporate sellers are slow to consider hiring professional help for acquisitions. Acquisition efforts may be one of three or one of 20 priorities for the internal management staff member. Inevitably there are times in an acquisition when internal staffers simply to do not have time to deal with such matters.
If acquisitions are valid and sensible mechanisms for your growth, do yourself the favor of hiring professionals to help. Acquisitions are, by their nature, subject to enormous surges in the amount of time and talent required. A strong merger and acquisition firm can give you the talent you need when you need it, and can provide expertise that internal people may not have.
When the time comes to cast your net for acquisitions, be sure to search a full and creative 360 degrees for candidates. Let staff know you are always alert and interested in acquisitions. Allow free flow of suggestions to your M&A professionals. Get ideas from equipment suppliers, material venders, customers, trade association contacts and others.
The optimum acquisition possibilities often come from unusual sources. Be attentive, be respectful of confidentiality and be professional and prompt in your attention to opportunities. Your efforts will be rewarded with great competitive intelligence, and wonderful chances to grow quickly and profitably.
Douglas is managing director of Douglas Group of St. Louis.