“Companies that focus on what they are going to get from an acquisition are less likely to succeed than those that focus on what they have to give it.”
The author, Roger L. Martin, uses examples of large companies using “acquisition[s] to enter an attractive market” stating that they are “generally in “take” mode” and thus fail. Prof. Martin points out that, acquisitions made by companies in “take mode”usually fail to earn a return because “the seller can elevate its price to extract all the cumulative future value from the transaction”.
So how exactly does and acquirer “give” to an acquisition? The author highlights four ways an acquirer can “give” or “improve its target’s competitiveness”.
1. Be a Smarter Provider of Growth Capital – Martin provides three examples of ways acquirers can be better providers of growth capital. 1. By acquiring smaller companies and funding their growth in a way that the capital markets don’t (good in less developed capital markets), 2. By bringing intellectual capital and growth resources, and 3. “facilitate the roll-up of a fragmented industry in the pursuit of scale economies“.
2. Provide Better Managerial Oversight – Another way to “give” is “to provide [a target] with better strategic direction, organization, and process disciplines“. He highlights examples of acquirers who have struggled and succeeded noting that “Better management is more likely to result from PE buyouts“.
3. Transfer Valuable Skills – The third way to “give” in an acquisition is “by transferring a specific—often functional—skill, asset, or capability to it directly, possibly through the redeployment of specific personnel.” Martin uses the example of PepsiCo acquiring Frito-Lay and transferring “the skills for running a direct store delivery (DSD) logistics system—a key to competitive success in the snack category”.
4. Share Valuable Capabilities – Rather than transfer skills as discussed above, the fourth way to “give” is to share. A good example is Procter & Gamble who shares its customer team, media buying capabilities, and even its powerful brand in some instances.
In my experience, acquirers often look at targets thinking; how will they help me enter a new market, access new customers, scale my technology, etc. Those acquirers tend to accept higher valuations from sellers, thus overpaying for future value that the target is going to add (or might add) to the business.
When I work with acquirers who have plans to improve the target (not use the target to improve the acquirer), they tend to negotiate better deals and have greater long-term success with less pressure for the acquisition to be a game changer for the acquirer’s business.
Are you and acquirer? How do you plan to improve your targets?
Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.
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