Adrie's Blog

Acquisition(s)

Acquisitions are often fantasised about. It seems a quick route to growth and is often used by megalomaniacal mangement to stimulate their own egos.

Many acquisitions are doomed to fail - because of cultural differences, (uncommunicated) differences in agenda, egos that are not in sync with business objectives. The latter is why you so often will see that there are rounds and rounds of discussions between the management of both companies about who will end up in which role and earn what.

I wanted to raise the topic of acquisitions in SME's here. Before you ever do an acquisition yourself, you have to ask yourself a number of questions, starting with - does this merger actually enhance the worth of the organisation and the shareholders and what does the risk profile look like. Following in quick order thereafter are - can I afford it, and how do we pay for it - cash, shares or a combination of the two?
Other questions to consider are -
Do we settle for an earn-out (i.e. payments over time based on performance) or do we pay upfront.
Do I leave management in place, or do I replace them immediately. I always prefer the latter, although that does imply you are not able to opt for an earn-out ofcourse. The advantage is that you can integrate the company fully with your own and change the name if you wish.

Make sure you acquire for the right reasons, such as:
New, complimentary products or services
New client base
Scale
Efficiency in marketing and sales, cross-selling to existing customers.
Cost savings

I often hear the word 'Synergy' when discussing an acquisition or coming merger - I often hear that as meaning that they cannot explain exactly why they are acquiring in the first place. it's a cliche which you should avoid at all costs.

Make sure that you are matching cultures too - you don't want a battle on your hands post-merger, where the company and all its personnel is only internally-focused!

I have done scores of acquisitions over many years. My biggest mistakes were:
Buying companies that were too small and turned out to be fully dependent on the founder. Once he/she disappeared, so did the revenues.
Cost cutting over the final years prior to the acquisitions which created a big gap in terms of technical development and marketing.
The acquired company did not want to integrate with our company, and wanted to continue to run just as they did before - thereby undermining the reasons for acquiring them in the first place.

Make sure you do a complete Due Diligence, using your own and outside specialists - like accountants and law firms. Make sure you cover your risks in terms of IP, liability, pensions, agreements of employment, client agreements and terms of delivery.

To share my own experience, - before you start on the acquisition trail - make a plan and ensure you already have a timeline for how and when you have to integrate the acquired company - don't leave it to happen by itself because it will end up being a huge distraction. Try to close the complete circle as quickly as you can do so, without losing sight of all the above. The sooner it's done, the sooner you can return your attention to running the newly formed company!

And last of all - bear in mind that only a small percentage of acquisitions work the way you anticipated. The larger percentage is OK and a small part fails completely. Be realistic.

________________________________________