Put your growth on steroids: Use small-scale acquisitions to close capability gaps
- 10x Results Partners
- May 8, 2020
- 4 min read
“Our business is really pretty simple. When you look at the deal and its structure looks like an octopus or a spider, just don’t do it. That kept us out of a lot of things.”
― Tim Sloan
Ask your top and middle managers one question: “Should we as a company do more M&A? Or less?” You will likely see that your team is split in half. Some people will fiercely argue against M&A, stating that it leads to the best people leaving, inward focus, and unrealized synergies. And then there will be people who will equally fiercely argue for M&A, stating that it helps the company build much-needed capabilities and expertise to win in today’s market. So, who is right?
Both sides are right. If done wrong, M&A destroys company culture and shareholder value on a massive scale. But if done right, M&A can propel your growth to the next level. Here, we will argue that you should probably do more M&A (of the right kind and for the right reasons).
What are some of the key learnings and insights around M&A that you can apply in your company right away?
Checklist: M&A best practices
Acquire significantly smaller companies: There is no such thing as a merger of equals. When two companies of the same size merge, there will be massive infighting around positions and the prevailing company culture. It is much better to acquire significantly smaller companies (e.g., less than one-third of your size). Then, it is clear from day one who the acquirer is and who is being acquired. This will help ease and speed up the integration. Actually, in our experience, the best strategy is to do “micro-acquisitions” where the acquisition target has less than 5 percent of your revenues or number of employees. The primary reason to do these “micro-acquisitions” is to close important capability gaps. These “micro-acquisitions” have three main advantages: (1) They do not disrupt the company, (2) they allow you to “surgically” close capability gaps, and (3) they are very cost effective.
Acquire capabilities: The principal reason for acquisitions should be to get a hold of capabilities that are a key ingredient to your future business success (proprietary processes, intellectual property, and/or products/prototypes). You should not acquire primarily for the people as they may leave relatively quickly. You should also not acquire primarily for cost synergy or market share reasons. These are very fragile due to potentially incompatible processes and a strong inward focus during the integration period.
Look beyond your industry: Many companies look only within their industry for potential acquisition targets. In reality, often the most attractive acquisition targets are outside your industry. Remember, what you are after is unique capabilities that will allow you to provide exceptional products and services to your customers. You will not get this level of uniqueness when you only look within your industry.
Prepare well and do it quickly: M&A is a period of enormous stress and pain for the organization. Minimize this painful period by pre-planning well (who to take on which job; where and how to integrate).
Decide on how to integrate: Integration is not a black-or-white game (either full or no integration). Instead, be clear on where to integrate functions and processes and where to leave them separate.
Don’t overpay: Be clear on what the acquisition is worth to you (future earnings potential of the target plus synergies to your core business from transferred capabilities plus synergies from integrating selected processes). Discount the potential max acquisition price at least by 15 to 25 percent for difficulties that may arise during the integration, but are not yet foreseeable.
10x Results "Million $ Idea"
Build your M&A muscle. Successfully identifying targets, negotiating, structuring the deal, integrating, realizing synergies is an art that requires practice.
Start small; learn from it and then gradually build your M&A muscle. Not doing any M&A is as wrong as going too big too soon.
When making acquisitions, always ask yourself: “Would this acquisition add a capability that is critical to our long-term success? Would it give us a significant advantage versus the competition?”
The last question that remains is: “When should you acquire a company and when should you partner?” The short answer is: When the other company possesses a key capability or another asset that is critical to your mid- to long-term success, it is best to go for acquisition. This will allow you to secure the capability long term. When, however, this capability is important only in the short to mid term and may be obsolete quite soon or is not mission critical (in other words, good alternatives are available), then you should instead go for a partnership agreement. This will allow you to retain more flexibility. It will also tie up fewer assets.
Moving to Action: Questions to Ask Yourself
Taking a mid- to long-term view, how will the competitive landscape in your industry evolve? How will customer demands change? Are you well prepared? Which capabilities are you lacking?
How can you build those missing capabilities? Organically in-house? Do partnerships make sense? Or are acquisitions the better way to go?
Where should you and your team look for acquisition targets (also outside your industry)? How can you screen potential candidates?
How can you start building your M&A muscle?
This insight is a chapter from the book "10x Results: 240+ proven ideas to boost revenues, profits, customer loyalty, and employee engagement". The book is available on Amazon.
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