Planning Your First Acquisition
My Facebook feed regularly shows ads from consultants and gurus on a range of topics. Last week, one came up saying “Acquiring companies is actually really easy”. I had a quick surge of dismissive rage having acquired several companies- some ending up very successful and some a dismal failure.
My subconscious railed against the word “easy”. But after pausing for a while, the spruiker was correct. It is very easy to acquire a company. Pay what they want, and it’s done. But the hard part is what comes a split second after the deal is done.
Acquisitions are not only a way of achieving faster growth and scale, but they can also be fun and exciting. Whilst they can be fun and exciting, they are not easy to integrate, and the fun soon disappears if things go off the rails.
The stark reality is most of them fail. There are many studies and surveys available online demonstrating that 70-90% of mergers and acquisitions either fail to deliver what was planned or fail all together.
Despite this depressing statistic, the allure of “easy” and rapid growth and the stand out success of a small percentage are what keeps many business owners and corporations in the M&A game.
How do you ensure you are in the top 10% every time? If you have not done an acquisition before, how do you end up achieving total success the first time around?
Assuming the normal due diligence is done correctly (product, market, financial, legal, etc), here are some other high-level steps that we find are often overlooked:
- Understand the lifecycle location of both yourself and the target. What are the differences that will need to be bridged?
- Ensure due diligence isn’t just about the product, the market or the synergies. Just as important is doing DD on the “culture”. Culture includes the current organisational climate, the managerial styles of the team, and processes, as well as the pervasive values of the organisation.
- Choose a human capital due diligence and post-acquisition integration methodology that is tried and tested.
As with the human lifecycle, there are different conditions experienced at each phase. These conditions are often a symptom or manifestation of the lifecycle location. It is no different for the lifecycle of organisations.
Young companies often have high flexibility and ability to change, whilst having low internal controls and predictability. As you age, flexibility tends to drop, whilst controls and predictability tend to increase.
Once aging starts to take hold, controls and predictability start to kill off flexibility, until ultimately the lack of flexibility to respond to the market causes a loss of control and predictability.
The “sweet spot” is what we call “Prime”. Good flexibility to respond to a changing world, but with a high enough level of self-control, internal controls and predictability.
Whilst this has much relevance to managing businesses generally, it is extremely important for acquisitions.
There are different problems, opportunities, goals, structures, processes, behaviours, etc at each phase of the lifecycle. Therefore, there is a potential for large variances between the acquirer and the acquiree.
If these differences are understood, and a methodology exists to bridge the gap, success is a much more probable outcome.
However, if the difference in lifecycle location is not understood, especially by the acquiring party, failure becomes a high probability.
The differences lead to conflict. What works for one, doesn’t work for the other. The conflict often turns destructive, and destructive conflict leads to energy being consumed by unproductive arguments and disintegration.
Whilst all this energy is being consumed, often performance drops and what was hoped would be achieved by the acquisition melts away.
So, during due diligence, know where each entity is in the lifecycle. Understand what is normal, what is abnormal, and what is fatal.
Adizes has a lifecycle test to make this easy, and we will discuss this in depth, along with lifecycle consequences for acquisitions in our upcoming sessions with Shoham Adizes in Brisbane and Sydney.
Culture DD and Post Acquisition
There are many different definitions of what culture is and should be. I prefer a definition of what a “healthy” culture should do. We believe that a very basic definition of what a healthy culture does is “identifies, prioritises and resolves problems and opportunities proactively and constructively in the face of day to day demands”.
From the moment the deal is done, the organisation is going to be faced with new problems and opportunities. You will succeed if they can be identified and resolved proactively and successfully. If they can’t, that is going to lead to even more problems, and unresolved problems lead to crises.
So, how good is the “culture” at doing this? Is it reliant on a few individuals or has this ability been cascaded into the organisation?
The more this capability has been cascaded, the more robust and capable it is to deal with issues at every level. When this capability is held with only a few individuals, the risk of challenges occurring after completion of the acquisition is higher.
If acquisitions were successful just because of the normal DD processes, there would not be the level of failure seen the world over. So, consider doing something different to ensure you achieve different results to the norm.
If you are working in an organisation that does acquisitions or is planning one, consider attending the upcoming ‘Building High Performing Cultures of Mutual Trust and Respect’ workshops being held in Brisbane and Sydney.