Growth Strategy - Are Acquisitions Worthwhile?

Author: Jim Riley Last updated: Sunday 23 September, 2012

Are acquisitions worthwhile?

When firms choose between the options for pursuing their growth objectives, there are several reasons why acquisitions appear an attractive choice:

Existing products are in the later stages of their life cycles
Business lacks knowledge or resources to develop organically
Speed of growth is a high priority
Competitors enjoy significant advantages that are hard to overcome

Looking at the history of business acquisitions over recent decades, it is possible to identify a wide range of reasons why they have been made:

Possible Reasons for Making Acquisitions
Speed of access to new product or market areas Increase market share Acquire new skills Access economies of scale (perhaps by combining production capacity) Secure better distribution Acquire intangible assets (brands, patents, trade marks)	Overcome barriers to entry to target markets Defend itself against a takeover threat Enter new segments of existing market To eliminate competition Spread risks by diversifying To take advantage of deregulation

The main upsides and downsides of making acquisitions can be summarised as follows:

Advantages of Acquisitions	Disadvantages of Acquisitions
Quick access to resources & skills the business needs Overcomes barriers to entry Helps spread risk (wider range of products and greater geographical spread) Revenue growth opportunities (synergy) Cost saving opportunities (synergy) Reduces competition May enable economies of scale	High cost involved Problems of valuation Clash of cultures Upset customers Problems of integration (change management) Resistance from employees Non-existent synergy Incompatibility of management styles, structures and culture Questionable motives High failure rate Diseconomies of scale

Many acquisitions are justified (when they are made) in terms of the likely “synergies” between the acquirer and the target. Synergy can be defined as:

When the whole is greater than the sum of the individual parts

In theory synergy arises in two broad ways:

Synergies

The problem with synergy is that acquisitions normally fail to deliver the promised returns. It is widely accepted that over 50% of takeovers destroy shareholder value – i.e. they do not earn a return (higher profits) that justify the investment made.

Why do acquisitions often fail to achieve the required rate of return and/or fail to meet their original aims? Here are the most common reasons:

Price paid for acquisition was too high (over-estimate of synergies)
Lack of decisive change management in the early stages
The takeover was mishandled
Cultural incompatibility
Poor communication
Loss of key personnel & customers post acquisition
The creation of a lumbering giant that is soon outpaced by smaller rivals

Acquisitions therefore provide some important change management challenges. Not only are they relatively risky actions (certainly compared with internal development), but the risk is heightened if the change management issues are not addressed before, during and after the acquisition.

A fundamental challenge posed by an acquisition is one of corporate culture.

Employees	E.g. Uncertainty about acquirer intentions & strategy (cost savings, rationalisation)
Customers & suppliers	E.g. continued relationship; impact on quality
Management (of acquired business)	E.g. duplicated roles, new hierarchy