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Successful acquisitions: A boost to your core activity

Last Updated: Monday, 25 February 2008

By Tom McKaskill

Acquiring a business, by whichever means, is more likely to be a success if the new enterprise can be tied to your primary business’s core strategy.

Undertaking an acquisition strategy is not for the faint hearted. The marketplace is littered with numerous failures in both large and small businesses.

Even so, there are acquirers that are consistently successful. One of the characteristics of their success, which has been identified through several research studies, is that their acquisitions form a key component of their overall corporate strategy.

Basically, to get the proper level of attention, an acquisition should contribute to the underlying core strategy of the business. In that context, one of the key acquisition strategy questions should be: “What do I need to make my core strategy successful?”

Too often, acquisitions are opportunistically undertaken or they are peripheral to the main strategy of the business. While this probably works in good times, just wait until the pressure is on and senior management have to choose where to put their effort. Those parts of the business that are fundamental to the core strategy get the resources and attention, and the rest falls by the wayside.

The same approach is usually taken with investment evaluation – if it is part of the core strategy it gets serious evaluation, as the risks of getting it wrong are too serious to not do the job properly.

Start your acquisition strategy with the core business strategy. You should be setting out to identify those capabilities and capacity issues that inhibit the ability of the business to achieve its growth and profitability goals. As each limitation is identified, it goes on an acquisition criteria list.

This gradually builds up a set of profiles for acquisition targeting. The acquisition activity then sets out to find firms that can overcome core strategy limitations. The evaluation of any target firm is then undertaken against the identified problem or limitation.

Since the impact of such a limitation is understood, the acquirer can also place a value on resolving the limitation or problem. This provides a strong investment case for the acquisition. Because of its application to core strategy, the responsibility for the acquisition at an operational level will also be reasonably clear. Thus active involvement of line management in the evaluation can be expected and responsibility for integrating the new assets or capabilities is also usually apparent.

While this strategy should be adopted by any acquirer, high growth firms have a much greater need to take this approach than most businesses. Generally high growth firms run out of resources quickly. If you grow by recruiting skilled staff, you soon run into recruitment and training problems. If you need to rapidly build out manufacturing capacity, you soon discover that acquiring and fitting out new plant is a very slow and bureaucratic process.

Buying capability and capacity is a fast track for such companies. It also often solves the funding issues as well. Where debt finance is hard to get for growth investment, it is relatively easy to source by buying an existing profitable business.

Businesses that have strong growth and profitability can afford to pay a premium to acquire good firms where they can readily capitalise on the newly acquired capacity or capability.

If your strategy is to grow, then the last thing you should be taking on is peripheral activities or those that are going to suck out your best talent and waste your money. Your most successful acquisitions will be those where you stick to those acquisitions that solve core problems and by targeting firms that can make a contribution quickly.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.