Advice for Entrepreneurs, Mergers and Acquisitions, News, Editorial
7 Deadly Sins to Avoid When Acquiring a Business
One of the most common critiques of mergers and acquisitions is that many, perhaps even most acquisitions fail to meet the expectations of management and shareholders. And as an M&A professional with 17 years of experience, I have to admit, there’s some truth to that. Some acquisitions are head scratchers (eBay’s acquisition of SKYPE in 2005), and some fail spectacularly (remember DaimlerChrysler?). But if your business can avoid these 7 Deadly Sins, chances of success are reasonably good:
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1. Death by Distraction: The process of finding, negotiating, and closing on acquisitions can be time consuming and distracting. Hire an investment bank and other competent outside help to reduce the distractions to your management team. That’s not to say you should outsource the development of your strategy, sound decision making, or due diligence – but don’t allow your team to become so involved that their attention is taken away from running your business. M&A activity can be a magnet for management attention. Don’t forget to mind the store.
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2. Fools Rush In: It takes time, patience, and discipline to be successful when it comes to mergers and acquisitions. One of the reasons Cisco Systems is so effective is that they have made acquisitions a core competency and dedicated significant resources to staffing a team of professionals with a long-term perspective. That is, if you ask ten business owners if their business is for sale, your team is most likely to focus on the one who answers “yes” (or even “maybe”). This is an over-simplification, but the fact is that the best acquisition opportunities will often play the game of “hard to get”. To be successful, you need to thoroughly consider all of your options – one of which is to wait for the right opportunity to become available. Many companies make the mistake of looking first and then seeing how a prospective acquisition could possibly fit.
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3. Compromise Culture at Your Peril: The term “Corporate Culture” is often misused and misunderstood, and has therefore lost much of its meaning. But corporate culture is truly important, and compromising that culture can be disastrous. One example would include the product-focused business (for example, a software company) that acquires a services business in order to create “synergies” and drive more revenue per customer. This is a huge red flag. Software companies sell a product. Their culture is driven by creating something useful that can be sold again and again with little or no customization. Services companies sell customization. I’ve seen countless mergers fail as a result of executives forgetting that corporate culture matters.
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4. Ego over Economics: Many executives will envision the combined company in a salesmanlike manner… bigger, stronger, etc. Don’t forget to consider the way your competitor’s sales team will spin it. Sometimes, being small and specialized is a critical success factor. Jaguar for example was a valuable premium brand before it was acquired by Ford in 1989 – did Jaguar make Ford stronger? Given the fact that Jaguar did not produce a profit from 1989 until 2008 when Ford sold the business, I’d say not so much.
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5. Moving the Goal Posts: Before you can evaluate any acquisition opportunity, you need to have a strategy that should include specific, measurable, agreed-upon objectives for growth, geographic expansion, cost-containment, etc. Evaluate acquisitions objectively based on whether or not those objectives are likely to be achieved, and you are more likely to find success. Avoid the all-too-common mistake of moving the goal posts at half time.
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6. Relying on Faulty Assumptions: If you are wondering how you will manage expansion from one location to two (or twelve), you’re not ready to make this acquisition. Too many acquisitions fail because the business tries to operate in areas that the team has not thought through, or where they have relied on insufficient data. Failure to plan is planning to fail.
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7. Tunnel Vision: Ask ten business owners if their business is for sale, and your team is most likely to focus on the one who answers “yes” (or the one who has already hired an investment bank and put the business on the market). While you’re focused on Company A, Company X is growing twice as fast and making higher margins. Shouldn’t you be pursuing Company X? Company X might play hard to get, but it might be worth the wait.
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