The costs and risks are not the only factors businesses need to take into account when weighing up mergers and acquisitions.
MANY people judge the relative success or failure of an acquisition purely on the financial outcome of the target company post acquisition.
I would argue that are two types of acquisitions – financial and strategic. The key differentiator between the two is, where the return on investment (ROI) is realised.
A financial acquisition is one where you expect the ROI to be derived from within the acquired entity. Many people view all acquisitions as financial acquisitions, because they look at the financial return from the acquired asset, and then look at the price that was paid. If the equation doesn’t make sense, they call it a failed acquisition.
A financial acquisition is one where there is very little if any integration and the acquired company is essentially left to stand alone. These acquisitions typically occur as a part of a diversification strategy, where a company will buy a business that has no synergistic benefits with their current business operation/s or business model/s.
On the other hand, a strategic acquisition is one where the ROI is ultimately realised within the acquiring entity. A strategic acquisition can be undertaken for a multitude of different reasons but ultimately there are two main drivers for such an acquisition – risk mitigation and/or access to opportunity.
A strategic acquisition may aim to acquire an entirely new core competency, to take a company into new markets, to move up or down supply chain, gain access to plant and equipment, access someone else’s intellectual property, or cross pollination of a customer database.
Such an acquisition may also ensure that the threat from competition, a supplier or customer is removed or mitigated. The reasoning is very much determined by an individual company’s business model, with the inherent risks in the transaction playing a very important role.
Strategic acquisition is, however, not without its own risks and is not necessarily easy to do. It can be a lot harder to evaluate a strategic acquisition as there can be a need to make semi-educated assumptions about the target business from outside the business.
Additionally the level of integration between a financial and a strategic is vastly different. A financial acquisition may integrate some governance structure and a small level of system integration, however a strategic acquisition will typically require a high level of integration, in order for the purchasing entity to realise its ROI.
In my experience, buyers handle this process poorly. Buyers must establish an integration team before approaching any acquisition target/s, as they need to understand the integration hurdles within their own business first, before attempting to integrate a new business.
Many organisations fail to realise that the longer it takes to integrate a business, the longer the ROI is delayed, and consequently the more that has been effectively paid for the business.
The decision as to whether to undertake an acquisition should firstly be determined by your corporate strategy and then by your business model. Some business models will not benefit from M&A and some corporate strategy will not be furthered by M&A either.
While there are many occasions where mergers and/or acquisitions fail to deliver the desired outcomes, it’s important to look at the primary reason for the initiative and whether those specific outcomes were achieved.
M&A has a whole lot to contribute to corporate success, if it is simply handled with the respect that it deserves.
While M&A activity is a wholesale change for any organisation, if managed appropriately, the benefits will far exceed the risks.
Clinton Bradbury is managing director of the WA Corporate Acquisition Register