The Point: The thought of acquiring another company can be a very seductive strategic plan when CEOs wish to improve corporate performance and overall growth. Companies spend a huge amount of money every year on acquisitions – yet studies have confirmed that the rate of failure among mergers & acquisitions is at an all time high (peak!). What exactly are the causes of these failures (and more importantly successes)? In this post, we’ll discuss the importance of a Mergers & Acquisitions Strategic Plan and provide 3 Tips… Enjoy!
What Leadership Does Wrong?
A large number of acquisitions miss the mark in regards to expectations since organizational leadership mistakenly attempts to coordinate candidates with the strategic aim behind the arrangement, neglecting to recognize bargains that may enhance current operations and those that could drastically change growth prospects of the company. These often make organizations pay the wrong price (i.e., overvalued) and integrate the acquisition wrongly.
There are two motivations behind acquiring a company, which most executives frequently befuddle. The first, and the most widely recognized one, is to increase your organization’s present performance – That is, to hold a superior position, while cutting expenses. The second, and less-known reason for acquiring a company, is to re-evaluate the mode of business operations through expense reduction – This is most likely to confound investors with spectacular pay off (especially when labor costs are slashed).
Integration often determines whether the acquisition will succeed or fail. You should be able to describe exactly what you are buying to foresee the way integration will play out.
One powerful way forecast effectively is to view the established targets/goals in its business model. Additionally, value is created and delivered through 4 interdependent elements of a business model:
– The customer value proposition is the first element
– The profit formula
– Available resources (such as technology, employees and cash)
– Lastly processes (including budget, R&D, manufacturing, and sales)
Three Tips of Having a Good Mergers & Acquisition Strategic Plan
Tip #1: Helps in Acquiring Resources That Command Premium Prices
Having plans to improve a new product or service is no guarantee to command a price premium. Buying improved components (compatible with their products) is a strategy that is routinely done by some companies to command premium prices.
Tip #2: It Helps to Lower Company Costs
Leadership often promise that an acquisition will lower costs, where in reality, it’s only possible in few scenarios, such as, and acquiring company with high fixed costs can expect higher profit potential. Most deals succeed using almost the same strategy.
The parent plugs some particular assets from the procurement into its current model, ejecting whatever is left of the acquired model and closing down, laying-off or offering redundant assets for sale. The execution help comes about because of utilizing the objective’s assets such that scale financial matters can drive down expenses. The strategic use of resources from the target will help in boosting performance and drive down costs
Tip #3: A Disruptive Business Model can be Acquired
Disruptive business models and products have been proven to be the most reliable sources of massive growth in both margins and revenues. Disruptive companies typically offer simpler and more affordable products than what bigger players offer. Their footholds are well secured in the low-end of a market and gradually step up to products with higher margin and performance.
In Mergers & Acquisitions, we all believe that success will be the end result. However, wrong companies are being purchased daily for the erroneous motive, wrong elements are integrated into the wrong business models, and wrong measures of value used when pricing deals (This is a mess that shouldn’t be!) You must be able to predict accurately if a company under acquisition consideration is a great deal, or just a debacle in the waiting!
PS – If you or your organization are challenged as a result of M&A activity, please don’t hesitate to drop me a line and request future post titles! Here are a few of the other M&A titles previously published/in the works:
– How to Successfully Survive Mergers & Acquisitions
– M&A: Creating Shareholder Value
– M&A: Should You Go For Stock or Cash?