Growth by Acquisition…doing the math

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As your company works out its growth strategy and assesses the options for inorganic growth through acquisition, the headline expectation of benefit may not be as assured as the simple math that you may see. Let’s take a simplistic view of an Acquisition or a Merger and try to answer the question chalked in the panel.

Talk of acquisition creates a special atmosphere in the buying company, sometimes both companies. Initially through the Executive Management team close to the deal, word spreads to Middle Managers and Employees.  It’s not always a good thing for Employees as you start to look towards synergies, but for now let’s take a pure and positive corporate view of this.

Whether you are going for Horizontal acquisition (Market Share) or Vertical acquisition (Value Chain), there is always due diligence, there are always lots of advisors, but the target Company should add something to your alchemy. What Executives are looking for in most cases is a simple Venn diagram for (a) the overlap, (b) the differentiated access to revenue and profit and (c) the cross selling opportunities of the non-overlapping areas.

So an expectation is set, established and the business case agreed. Sale! (Gavel banged, deal!). The expectation?…look towards the simple sum… ’1+1 = ?

The optimist may add up all the benefits and get to an answer of ‘2 + x‘. Value Add thinking. This is how we should be thinking, especially when trying to get out of a recession.

The pragmatist may say that it’s a simple investment, so ‘what have we bought?’ The answer is ‘2‘.  They have a model, we have a model, we are both continuing to looking after our own customers and the Value will be that we are a bigger player in the market and we may have more control of the value chain.

Then there is a pessimistic view. Your overlap causes confusion in your portfolios, customer dissent and you end up with a compete operating model with complexity. It will cost you revenue, profit, market share and your Talent will leave you. Therefore the answer in this case, simply stated is ‘2 – x‘.

In each case x can represent the integration benefit (+) or risk (-)

So what is the real difference between optimism and pessimism in the Acquisition world? Here are my thoughts on what can happen even though everyone is trying to maximize a result.

As the scouting is conducted, there are ‘Plays’ that are considered of the value of acquiring another company. The Plays get valued on a set of assumptions. The assumptions are tested again in the due diligence. The results give the Executive Team and Shareholders the confidence that this is the ‘strategic fit’ for the investment. We can ignore Acquisitions that are made for turnaround purposes at this stage, as they would not necessarily be looking at long-term growth, but pure investor value. However the principles that follows may still apply to these cases.

The purchase is made, the champagne is opened, the PR announcements are broadcast and the expectation is set by the CEO to the employees that this is a “critical investment for our future” and we will be in a “period of transition” to merge the companies activities.

If both Companies have done their homework, the first week after the purchase should see Post-Acquisition Integration teams, fuelled with your best Talent (not necessarily Senior, but empowered people who understand how both Companies work) starting a series of planned activities. They should be looking to work out how you bring capability together, what you keep apart and what programmes are required to drive the synergies. Each functional area should have a Play for what is the optimum solution to meet the investment and corporate strategic aims. Nepotism and Stovepipes should be highlighted and removed and a series of Integration Metrics agreed quickly of what ‘Good’ looks like. So on a route like this…1+1 = 2 + x is a possibility.

Let’s take a look now at what can also happen to get a reduced return.

We start with post-Acquisition Integration. You agree the merger principles, but leave the room without a plan and an end state. No plan means that you have limited ownership and you may not have executive sponsorship. The two companies continue to perform to the expectations of what they are today, with probably a little more load to Middle Management day jobs. At best you get to 1+1 = 2

The worst scenario is that you have a low intensity and low immediacy in your integration plans and the organisations start to compete. Employees and Managers get caught in the battle for delivering their own objectives and invariably, some of these Managers will fail. The lengthening process of Integration creates a noise for Managers and the finger of blame is used to defend shortfall. This is the CEO’s worst position. Unless you have an agreed play to rationalise the two organisations to a smaller but sustainable model, the payback to the Shareholder has been diluted.

What started as a Honeymoon Period could end in ‘Acrimony’. What you need is for the relationship to end in ‘Alchemy’.

So how do we keep the investment to the original strategic intent and how do we Make It Happen…Do the detail!  If you would like to know how Dugdale Consulting could help you with acquisition integration contact us.

In summary, the original ‘Sum’ was a multiple-choice question, but the real answer is in your choice for the plan you effect to determine the desired outcome.

If you find this article of value, please share it with your colleagues. Or need some advice, contact at enquiry@dugdaleconsulting.com

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