Google did 48 deals last year and in the words of David Lawee, VP of Corporate Development they were done for several reasons: grab new technology, acquire talented managers and of course revenue.
Acquisitions can quantum leap growth. They allow a transformation of scale. In previous blog posts I’ve highlighted the surprising value of being the best in the world and of course acquisitions are a great technique to achieve that. Specifically in this post I want to highlight the significance of acquisitions for small, medium sized businesses (SMBs defined as company employing less than 500 people) in creating rarity value, in creating a business that will attract a premium exit valuation.
First the health warnings:
- Almost all research done by PWC or Deloittes points to around 85% of acquisitions being a failure in the eyes of the acquirer.
- Research conducted by Cass Business School, covering 12,339 deals including 2917 acquisitions of distressed companies from 1984 to 2008 concluded that price was not the determining factor for success but that post acquisition integration was the key.
- In fact specific research done on experienced acquirers revealed that only those that invested in postmortems after the deal got better at doing deals. Which of course we all know, it’s not so much how much we do of something, it’s how we much learn from each time we do it.
- Diversification can be a bad idea accelerated by the technique of acquisitions. Laidlaw, the largest school-bus operator in North America bought heavily into the ambulance business in the 1990s. Ambulances are not transport businesses they are medical businesses. Big mistake.
- Remember acquisitions are not a strategy they are a tactical technique to achieve a well thought through strategy. First define your unique market and then use various techniques to dominate.
- Buy what you want to buy not what is up for sale.
- The most expensive acquisition you may ever make is the $1 price tag purchased out of Chapter 11 because the post acquisition costs to fix it run into the millions of dollars.
- Be prepared to train yourself to become an acquirer. Buy in or recruit key people to execute alongside your team.
So why do them.? Why take the risk? Particularly in a low growth period it can be tough to scale a business through organic growth. And scale matters. Building a business to define and dominate a unique market is the key to beating the odds of creating something of value.
I highlighted recently the odds of creating a business worth $10m at 1 in 6000. Acquisitions give you the opportunity to beat those odds.
The benefits of acquisitions:
- An acquirer knows that doing a small deal is as painful as doing a large deal so given a choice an acquirer will plump for the bigger private company. Therefore size has a big impact on your ability to be acquired.
- In the same sector with similar growth prospects, the larger private company will attract a higher multiple of profits from an acquirer in pricing the deal.
- The higher the market share the higher the profit margins and the better the trade terms from suppliers.
- The acquisition of special people can sometimes only be achieved by an acquisition. The acquisition of Groove by Microsoft could be argued was actually the acquisition of Ray Ozzie.
- Now to keep great people post acquisition, needs careful planning and the creation of an entrepreneurial culture. Google’s acquisition of Applied Semantics helped them develop the text advertising network called AdSense which is now a multibillion dollar revenue generator.
- They allow a deeper penetration of a vertical domain eg telecoms, government. Or geographical expansion within a territory or even overseas.
- It can allow you to offer your key customers solutions you know they need especially as your industry is transforming eg Ad Agencies need to offer real digital talent including development expertise.
- Scale brings the ability to spread bigger marketing budgets, R&D, sales costs over more customers.
- A smart acquisition can bring a new attractive business model into the family that can be nurtured over time.
- All businesses are in the talent war, both acquiring it and nurturing it. Acquisitions bring a new level of growth prospects to a company and staff are always attracted to an exciting narrative.
- Speed of movement. A well executed acquisition, integrated successfully can shave years off the timetable of your strategic plans.
Acquisitions don’t need to be just another big company technique. SMBs can and should embrace acquisitions to achieve their goals. It just requires careful planning and respect to ensure success.
Further reading on How To Do Acquisitions can be found here:
Assessment of Value & Investment Paper
