Uncommon Sense: Acquisitions--Avoiding the Quagmire
That leaves acquisition, which is the alternative many companies are pursuing today. Forget mergers; those only exist in daydreams and Fortune magazine. Acquisition is not a bad way to go, but there are some things you should keep in mind beyond the normal due diligence that focuses on accounting records.
It would be very unusual for rational owners to sell if they would benefit more by not selling. That means you will pay a premium for the business, regardless of what the due diligence says. Realistically, the premium is directly proportional to the future prospects that the present owners perceive--and can convince you really exist--for the business. Factor that premium into your acquisition decision; your return on investment is going to be less than what the firm being acquired has produced historically. If the deal seems too good to be true, it probably is!
Be sure the data you're using are really representative. In one instance, our client based the acquisition and pricing decision on a revenue stream projected from several years in which strikes hindered competitors' plants, exotic incentives stimulated sales, and shipments to distributors were recorded as "sales" instead of finished goods inventories. With no strikes, competitors fiercely going after lost business, no incentives and distributors shipping from their stock, you can imagine our client's first-year results.
Synergy is easier said than done. Sure, there ought to be economies when two businesses are combined, but someArial it works in reverse. Another client acquired its major competitor, and integrated the competitor's production into its facility. Imagine the chagrin a year later when sales of the once-competing product had tanked! Why? Because no one had informed the sales force the competition was over. They were still doing everything they could to wipe out the competition, even though it was no longer competition!
Don't forget that production technologies are always designed to be most efficient at a specific range of production, with hard automation for high output with limited variety, semi-hard automation for moderate output and variety, and manual processes for low output with high variety. On the other hand, be aware that due diligence focuses on numbers and history; it usually doesn't pay much attention to hard resources. Too bad, too, because having the right resources is often the key to the success of an acquisition.
Matching technology to demand is critical. No matter how well the acquired company did in the past, it will have to perform well--maybe even better--after the acquisition. Without the right technology, that will be tough, no matter how good the numbers looked in the past!
Have a realistic plan for making the acquisition work. You'll need one! And be ready with a recovery plan because you very well may need one to accommodate something you missed in the acquisition investigation and due diligence.
Buying another company can be a great strategy for growing the firm. It can mean overnight expansion and enhanced financial performance. It can also lead to disaster! Be a little pessimistic and take time to do it right!
What's your opinion? Whether you agree or disagree, Don Ewaldz will welcome your comments. You can contact him via the Bourton Group's Web site. Just point your browser to www.bourtongroup.com and click on "Contact Us".