Five keys for creating successful acquisitions
By siliconindia   |   Monday, 12 July 2010, 23:27 IST   |    5 Comments
Printer Print Email Email
Five keys for creating successful acquisitions
Bangalore: Companies advance myriad strategies for creating value with acquisitions but only a handful are likely to do so. It is perceived that acquirers in the most successful deals have specific, well-articulated value creation ideas going in. For less successful deals, the strategic rationales like pursuing international scale, filling portfolio gaps, or building a third leg of the portfolio tend to be vague, says McKinsey Quarterly reports. Empirical analysis of specific acquisition strategies offers limited insight, largely because of the wide variety of types and sizes of acquisitions and the lack of an objective way to classify them by strategy. What's more, the stated strategy may not even be the real one: companies typically talk up all kinds of strategic benefits from acquisitions that are really entirely about cost cutting. In the absence of empirical research, suggestions for strategies that create value reflect acquisitions work with companies. An acquisition's strategic rationale should be a specific articulation of one of these archetypes, not a vague concept like growth or strategic positioning, which may be important but must be translated into something more tangible. Improve the target company's performance Improving the performance of the target company is one of the most common value-creating acquisition strategies. Pursuing this strategy is what the best private-equity firms do. It is easier to improve the performance of a company with low margins and low returns on invested capital (ROIC) than that of a high-margin, high-ROIC company. Consolidate to remove excess capacity from industry As industries grow, they typically develop excess capacity. The combination of higher production from existing capacity and new capacity from recent entrants often generates more supply than demand. While there is substantial value to be created from removing excess capacity, as in most M&A activity the bulk of the value often accrues to the seller's shareholders, not the buyer's. Accelerate market access for the target's products Often, relatively small companies with innovative products have difficulty reaching the entire potential market for their products. Small pharmaceutical companies, for instance, typically lack the large sales forces required to cultivate relationships with the many doctors they need to promote their products. Bigger pharmaceutical companies sometimes purchase these smaller companies and use their own large-scale sales forces to accelerate the sales of the smaller companies' products. IBM, for instance, has pursued this strategy in its software business. From 2002 to 2009, it acquired 70 companies for about $14 billion. Get skills or technologies faster or at lower cost than they can be built Cisco Systems has used acquisitions to close gaps in its technologies, allowing it to assemble a broad line of networking products and to grow very quickly from a company with a single product line into the key player in Internet equipment. From 1993 to 2001, Cisco acquired 71 companies, at an average price of approximately $350 million. Cisco's sales increased from $650 million in 1993 to $22 billion in 2001, with nearly 40 percent of its 2001 revenue coming directly from these acquisitions. By 2009, Cisco had more than $36 billion in revenues and a market cap of approximately $150 billion. Pick winners early and help them develop their businesses The final winning strategy includes making acquisitions early in the life cycle of a new industry or product line, long before the competitors and the market see the industry's or company's potential. Johnson & Johnson pursued this strategy in its early acquisitions of medical-devices business. When J&J bought device manufacturer Cordis, in 1996, Cordis had $500 million in revenues. By 2007, its revenues had increased to $3.8 billion, reflecting a 20 percent annual growth rate. This acquisition strategy requires a disciplined approach by management in different dimensions, the investor should make multiple bets and expect that some will fail. The investor should also have the skills and patience to nurture the acquired businesses.

siliconindia