Building a Strong Strategy for Successful Add-on Acquisitions
Businesses operating in fragmented, moderate growth industries are always going to want to progress through acquisitions, but it can be a notoriously tough process to get right. So what are the best strategies for making a success of an add-on acquisition?
Lacking the resources or time to develop new technologies, new markets and cutting edge back-end tools is frustrating for many businesses and as a result, a huge number turn to add-on acquisitions as an answer. Without a solid strategy, however, this tactic will almost certainly prove destructive and could even spell the end for previously thriving organizations.
Where add-ons can fail
Without a clear strategy, there are several common areas where add-on acquisitions tend to fail. Overestimating the expected cost savings is one such area. Key management often believes that considerable savings can be made by centralizing field functions to a single headquarters. However, these field services may suffer as a result and customers will depart in droves if they feel continuity has been lost through lack of care over the consolidation process.
Another common error made by businesses is misunderstanding customers by presuming they will want to buy complementary products offered by the add-on firm. Without a clear understanding and goal in place, managers will find themselves with two unrelated and unintegrated product lines and customer bases.
Building a strategy
To avoid these setbacks, firms embarking on an add-on acquisition are encouraged to first be prepared to invest both money and time in getting the process right. Staffing the deal with experienced people and investing adequate budget in obtaining expert services for the due diligence and record-keeping process will pay dividends and will give a deal the very best chance of success. Keeping track of due diligence data throughout the decision-making process is also essential to avoid costly mistakes.Ensuring that the new add-on business fits the existing business model is one of the most important strategic elements when adding on a complementary business. Acquisition decision-makers need to ask themselves what it is they want to achieve with a deal. This could be simply a greater number of customers, a larger range of products, a reduction in costs, acquisition of key technology or a high-performing team. These factors are among the first that should be examined as they will affect what kind of business is targeted and how much should be paid. These factors will also have an impact on the way the new business is integrated with existing operations.
What is a successful acquisition?
Although many reports claim the failure rate for acquisitions is high, much of this research fails to isolate the acquisition to allow the study of its impact alone. Research carried out by EDHEC Business School MBA director, Emmanuel Metais, and Université de la Méditérannée professor, Pierre-Xavier Meschi, found that the success rate of acquisitions is actually as high as over 90 per cent. The researchers took the decision to count both firms that were still operational, thus profitable, and acquisitions that resulted in divestment, which in turn created value.Carl Doerksen, writing for theprivatebusinessowner.com, recently cited the purchase of Pharmetics Inc. by Monitor Clipper Partners (MCP) as the perfect example of a strong add-on acquisition. One of MCP’s firms, CMC Biologics, manufactures biopharmaceutical products, while Pharmetics manufactures OTC and nutritional products. Analysts expect MCP to use the add-on to help it move into new markets, while leveraging synergies created through the acquisition.
A report by Forbes on the book ‘How the Mighty Fall’ by Jim Collins, claimed that risky takeovers and misdirected faith in charismatic chief executives can sometimes lead to epic business failures. However, it adds that companies can circumvent unsuccessful add-on acquisitions through a combination of ‘sensible leadership and data-driven decisions.’
