Many companies, in a rush for gold, tend to focus on acquisitions as a means of conglomerating resources and capacity for better production and capacity for premium prices. However, this is not always the case. There are many disadvantages of acquisitions and many advantages of growing a firm internally without necessarily merging with other companies. Many business managers focus on the resources coming their way as a result of the acquired company or capacity but ignore primal issues of such acquisitions. Today I will deliberately walk us through the reasons behind the crumbling acquisitions even after massive investments into acquisitions a deal that has worked in some quarters but failed in others.
First, many of the firms fail the strategic acquisition test for lack of insight into the ideal candidate. The lack of understanding of which businesses best qualify for acquisition is one of the reasons that have appealed to me most. A blind purchase of a firm, whether it is big or has the potential to transform the purchaser's business, is a free ticket to failed acquisitions. The move to buy another company and incorporate it into one's own business must be a strategic one involving expert opinions and the nod of the stakeholders. This consultative move will allow the stakeholders and the experts to cross-check the integration purposes of the acquisition and weigh whether or not the firm acquired will add value through expanded corporate strength or will reinvent the business model of the acquiring firm. Without proper integration forecasts, it will be visionless to acquire a new firm.
Many firms, in their acquisition, fail due to ignored facts about the firm to be acquired and the firm acquiring. First, the business models of the two firms may differ. Secondly, the technology of both firms may significantly differ such that they are not compatible and the acquired resources are not helpful to the business of the acquiring firm. Another reason for the failure of the acquirer is the speculative pricing of the target business. In many cases, the buyer values the business transaction by the forecasted value that will be transferred to the acquirer, and this tends to overprice acquisitions. This valuation is just like selling a business through the bidder system in which case the business ends up overpriced. There is thus a general lack of objectivity when it comes to acquiring companies.
One sure way of ensuring the success of a business acquisition is through proper matching or integration of the business bought into the parent business. This focus will ensure a thorough review of the choice of business to be acquired, highlighting whether or not the business will help to scheme the business expansion or reinvention strategies well and to determine whether the focus is on the business model or the resources of the acquired company. For the former, the focus will be on the products and the technology to be gained. The reinvention goal will lead to a focus on the resources acquired and not the company itself. These include plants, customers, employees and technology of the acquired firm. Only when the integration agenda is firmly settled can the business bought be a source of success to the acquirer. To avoid the overpricing problem, the firm acquiring can do comparative pricing by relating the value of the target business to similar business. These are firms that do the same business and are in the same industry as well as are selling similar products.
In wrapping up, the business acquisition venture must be carefully and intelligently done with an expert analysis of the integration capacity of the new firm to the parent firm. The analysis must include assessing the feasibility of the target firm regarding the resources to be acquired or the targeted production capacity to come with the new business. Also, there is need to assess the actual value of the acquired business. Only then can the acquisition be a success to the parent company. Business must thus be thorough and professional in acquisitions.
Clayton M. Christensen, Richard Alton, Curtis Rising, and Andrew Waldeck: Why you should pay top dollar for a killer dealand other new rules for making acquisitions; The New MA Playbook (2) PDF
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