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.
Common core of unity
There has to be a “common culture” or at least a “cultural affinity.”
Successful diversification by acquisition, like all successful diversification, requires a common core of unity. The two businesses must have in common either markets or technology, through occasionally a comparable production process has also provided sufficient unity of experience and expertise, as well as a common language, to bring companies together. With-out such a core of unity, diversification, especially by acquisition, never works; financial ties alone are insufficient.
One example is a big French company that has been built by acquiring producers of all kinds of luxury goods: champagne and high-fashion designers, very expensive watches and perfumes and handmade shoes. It looks like the worst kind of conglomerate. The products have seemingly nothing in common. But all of them are being bought by customers for the same reason, which, of course, is not utility or price. Instead, people buy them because they are “status.” What all the acquisitions of this successful acquirer have in common is their customers’ values. Champagne is being sold quite differently from high fashion. But it is being bought for much the same reason.
Respect for the business and its values
The acquisition must be a “temperamental fit.”
No acquisition works unless the people in the acquiring company have respect for the product, the markets, and the customers of the company they acquire. Though many large pharmaceutical companies have acquired cosmetic firms, none has made a great success of it. Pharmacologists and biochemists are “serious” people concerned with health and disease. By the same token, few of the big television networks and other entertainment companies have made a go of the book publishers they bought. Books are not “media,” and neither book buyers nor authors – a book publisher’s two customer – bear any resemblance to what the Nielsen rating means by “audience.” Sooner or later, usually sooner, a business requires a decision. People who do not respect or feel comfortable with the business, its products, and its users invariably make the wrong decision.
Provide new top management
The business these people sell is their “child.”
Within a year or so, the acquiring company must be able to provide top management for the company it acquires. The buyer has to be prepared to lose the top incumbents in companies that are bought. Top people are used to being bosses; they don’t want to be “division managers.” If they were owners or part-owners, the merger has made them so wealthy they don’t have to say if they don’t enjoy it. And if they are professional managers, without an ownership stake, they usually find another job easily enough. Then to recruit new top management is a gamble that rarely comes off.
This applies particularly to a CEO who originally built the company that he or she sold. Very often this CEO has actually initiated the acquisition. He or she typically expects the acquire to make the changes that he or she has been reluctant to make for instance, get rid of an old employee who is a close friend and has served the company faithfully as it grew but has been along outgrown by the job. But still, the business these people sell is their “child.” And the moment it is owned by someone else, they become protective and see their job as defending the “chilled” against one of those unfeeling “foreigners” who now own it.
Promote across lines
Politically, the people in the acquired company become “us” determined to defend their business against “them.”
Even if all the rules have been faithfully observed, many acquisitions end up failing or at least take forever before they live up to their expectations. Legally the acquired business is now part of the acquiring company. But politically, the people in the acquired company become “us” determined to defend their business against “them,” the people in the acquiring company. And the people in the acquiring company similarly think and act in terms of “us” against “them.” Sometimes it takes a whole generation before these invisible but impenetrable barriers come down. It is therefore imperative that, within the first few months after the acquisition, a number of people on both sides are promoted to a better job across the lines. This way both sides see the acquisition as a personal opportunity.
The goal is to convince managers in both companies that the merger offers them personal opportunities. These principle apples not only to executives at or near the top, but also to the younger executives and professionals, the people on whose dedication and efforts any business primarily depends. If they see themselves blocked as a result of an acquisition, they will “vote with their fee,” and as a rule they can find new jobs even more easily than displaced top executives.