Is There A Foolproof Type Of Acquisition?

I am occasionally asked by those considering an inorganic growth tactic if there is one type of acquisition that is better than another, or which presents an inherently better chance of success. I must answer ‘No’ - no option that will statistically give more favorable results every time. The reason is that there are just too many objectives, kinds, and sizes of business buyouts to sort into different categories to which distinct calculations can be applied. The range of unique factors that must be considered in the due diligence of every possibility renders mathematical objectivity impossible.

This said, my years of experience in guiding mergers and acquisitions for small- to medium-sized business owners lets me say that certain scenarios do tend to lead to better outcomes.

It is fairly common to undertake an acquisition to improve the target company’s performance. Reduction of costs by increasing margin and cash flow and boosting revenue growth is the goal of every business, whether growing organically or inorganically. Of course, within this model, some circumstances prove higher gain than others, such as buying, improving and selling with no other acquisition transactions; or improvement of performance on low margin/low return company rather than a target company with already high margins and high return on invested capital.

Reduction of excess capacity is another reasonable goal in acquisitions, either in finding new needs to be met by existing means of production or in shutting down least productive plants among many while maintaining a certain number of facilities. Consolidation in sales force or in research and development are other forms of capacity reduction that are frequently undertaken to good end, although the bulk of the realized value does not always reach the buyer’s stakeholders - this often benefits the seller’s shareholders.

Acquisition is an ideal strategy to gain access to elements of growth that cannot be attained organically. Smaller companies challenged with bringing pioneering products to the market with limited resources may consider selling to a larger company with an established sales force to gain access to greater market share. Mutual benefit may be experienced when the seller has a product that uniquely complements the buyer’s. Similarly, technology and skill can be obtained by purchase quicker than development in-house, as well as avoidance of licensing fees and competition.

I do not tend to find economies of scale or picking winners early to be reliable predictors of success. In the first of these two, margins in the two companies are probably already quite tight, with little room for improvement in a merger. And picking early winners usually requires a much longer investment time than many investors are willing to back, not to mention a keen skill in prognostication, great patience, and willingness to fail.

I always counsel small business owners to consider acquisition as a means of growth, as the financial resources and the real business opportunities are available to the resourceful business owner. In the end, the ability to clearly articulate goals and implementation plans will best spell acquisition success. There is no substitute for meticulous due diligence before investing materially in an acquisition, no matter how good it looks from the offset. The owners of smaller businesses have the distinct advantage of taking their investigation to the desks and workstations of those they will be acquiring, where they are more able to detect and account for the myriad factors that will contribute to or hinder success.