Business Not Financial Strategy
“There ain’t no bargains,” and “You get at most what you pay for,”
Successful acquisitions are based upon business plans, not financial analyses. Acquisition targets must fit the business strategies of the acquiring company; other wise, the acquisition is likely to fail. The worst acquisition record of the last decades of the twentieth century was that of Peter Grace, the longtime CEP of W. R. Grace. He was a brilliant man. He set out in the 1950s to build a world-class multinational through financially-based acquisitions. He assembled the ablest group of financial analysts and had them scout all over the world for industries and companies with a low price/earnings ratio. He bought these companies at what he thought were bargain prices. The financial analysis of each Grace purchase was impeccable. But there was absolutely no business strategy.
By contrast, one of the most successful examples of company growth based on acquisitions was the one that underlined the stellar performance of General Electric during the tenure of Jack Welch as CEO from 1981 to 2001. The largest single cause of the company’s growth in sales and earning – and the resulting rise in the company’s market value – was the acquisition-based expansion of GE Capital. Of course, not all of them panned out. In fact, there was one major failure, the acquisitions seem to have worked out magnificently underlying practically all of them was a sound business strategy.
What the Acquirer Contributes
The successful acquisition is based on what the acquiring company contributes to the acquisition
An acquisition will succeed only if the acquiring company thinks through what it can contribute to the business it is buying, not what the acquired company will contribute to the acquirer, no matter how attractive the expected “synergy” may look. What the acquiring company contributes may vary. It may be management, technology, or strength in distribution. This contribution has to be something besides money. Money by itself is never enough.
The acquisition of Citibank by Travelers was successful because the acquiring company, Travelers, thought through and planned what it could contribute to Citibank that would make a major difference. Citibank had established itself successfully in practically every county of the world and had, at the same time, built a transnational management. But in its products and services Citibank was still primarily a traditional bank, and its distributive and management capacity way exceeded the products and services commercial banking can produce and deliver. And Travelers had a good many of these products and services. What it saw itself as being able to contribute was greatly to increase the volume of business the superb Citibank worldwide distribution system and management could sell, and at little or no extra cost.
Resource-Allocation Decisions
The allocation of capital and people determine whether the organization will do well or poorly.
The allocation of capital and performing people converts into action all that management knows about its business – they determine whether the organization will do well or well or poorly. An organization should allocate human resources as purposefully and as thoughtfully as it allocates capital. To understand a capital investment, a company has to look at four measures: return on investment, payback period, cash flow, and discounted present value. Each of these four measures tells the executive something different about a prospective capital investment. Each looks at the investment through a different lens. Decision makers should not evaluate capital investments in isolation, but as part of a cluster of projects. They should then select the cluster that shows the best ratio between opportunity and risk. The results of capital spending be assessed against expectations in the post audit procedure. Information gathered from the procedure can then be used to help make decisions about future investments.
The decisions to hire, to fire, and to promote are among the most important decisions of the executive. They are more difficult than the capital allocation decision. An organization needs to have a systematic process for making people decisions that is just as rigorous as the one it has for making decisions about capital. Executives need to evaluate people against expectations.
Six Rules of Successful Acquisitions
Acquisitions should be successful, but few are in fact.
Acquisitions should be successful, but few are, in fact. The reason for this nonperformance is always the same: disregard of the well-known and well-tested rules of successful acquisitions.
The six rules of successful acquisitions are:
- The successful acquisitions must be based on business strategy, not financial strategy.
- The successful acquisition must be based on what the acquirer contributes to the acquisition.
- The two entities must share a common core of unity, such as markets and marketing, or technology, or core competencies.
- The acquirer must respect the business, products, and customers of the acquired company, as well as its values.
- The acquirer must be prepared to provide top management to the acquired business within a fairly short period, a year at most.
The successful acquisition must rapidly create visible opportunities for advancement of for both the people in the acquiring business and people in the acquired business.