Inquisition versus Acquisition

The case for window shopping.

Mergers and acquisitions are exciting stuff. This is the sexy end of the growth equation. It’s all about structures and strategies, and trying to rearrange the mix so that one plus one equals three. If you like strategic board games, you’ll love this.

Sadly, in the real world one plus one usually equals only one – or less. The history of M&A is atrocious and the list of casualties grows each year. Why is that?

The excitement factor is real

It’s the born again business. Never mind that you are taking yourself with you. Suddenly you are going to grow exponentially in a dramatic transformation. Once these deals get momentum, groupthink favors a positive result. Everyone wants it to happen. There’s pressure to get the deal done. Issues like cultural fit or systems integration are barely scrutinized.

Then there’s the numbers. Existing performance is rarely a guide; merged forecasts are built on risky assumptions about combined blue sky. Positive thinking generates unrealistic prices for the target business.

Add some leverage and a successful outcome requires more than just a following breeze. Most failures can be sheeted back to paying too much. That put’s a huge onus on the combined entity. One study found 70% of acquiring firms to be worth less one year after acquisition.

So why do it?

There are three reasons why this option is worth investigating:

• The risk can be lower – unlike organic growth, you can see whether what you are acquiring is already working before you invest in it.
• Access to finance can be easier – if what you are buying is already working, banks and investors are more likely to provide financing at a reasonable price.
• Growth can be faster – rather than building a new business line or customer base, you just buy it.

Risk, cost, growth. These are great benchmarks against which you can assess your own strategies. It’s the argument for the informative look rather than the compulsory buy.

You don't have to

There is no business principle that says you must make an acquisition. But like any business strategy, it bears examination. A rigorous investigation of that option opens up a lateral perspective on your own business plans.

This forces two assessments: 

• a close examination of just how someone else is doing it
• a thoroughly researched view of what you would have to do to replicate it.

It doesn’t matter if the plan is to diversify, eliminate competition, integrate up or down, expand geographically or simply get more customers. Should you choose an organic route, your road map will be more robust as a result.

To acquire is not compulsory; to inquire, however, is part of your job. Rather than rule out an acquisition, rule one in. Use it to stress test your own growth strategies. Treat it as an intensive course on the competitive landscape in which your business must survive and prosper.

There's more on growth by acquisition in Recharge:Lessons to Revitalise Yourself, Your Team or Your Business. It's available in hard copy or e-book. To buy online, click here.

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