It is essential that a company must first and foremost, be a fit for your strategy. In the example from the previous post, the acquired company had a strategy focused on customer intimacy and the purchasing company did not share this strategy; therefore, when the acquisition occurred the value proposition of the acquired company disappeared and the business failed. It is important to examine how the candidate company’s mission, vision, value proposition, values and strategic initiatives fit in with your own. Be sure to look beyond marketing materials and strategic plans since these can be mere window-dressings that cover what’s truly going on in the company. Gather intelligence on what customers, partners and employees perceive to be the strategic factors.
In one company, the primary objective was to increase growth in top-line revenue. Subsequently, the firm purchased a smaller company to fulfill this objective. At the outset, the rationale for purchasing the company looked sound: the acquired company enjoyed a nice niche in which it had little competition; it had a good relationship with its customer and had a good reputation; there was new technology and Intellectual Property being developed; and there were international market opportunities. However, once the transaction was completed, the purchasing company aggressively took over and drove major changes: control was centralized with the purchasing company; the acquired company found itself hamstrung by new corporate processes coupled with the purchasing company’s lack of understanding of its business; approvals for the required resources to properly serve its programs were not forthcoming; and customer relationships became strained.
The development of new business was next to impossible. Within a few years, the business of the acquired company decreased significantly and other competitors stepped in to fill the void.
Looking back, one can’t help but wonder whether the acquisition could have been more successful if it were handled differently.
In the recent past, we’ve seen a continued practice of consolidation in Aerospace & Defence. Recent analyst reports have stated that in 2015 we will continue to see more and more of this activity.
Reasons for consolidation are typically based on growth objectives. Acquiring a company to create top-line growth is an approach to business growth that is as old as the hills. But be careful, it’s important to look beyond creating higher revenue numbers.
In the west, where labour and overhead costs are high, technology and IP ownership continue to be discriminating factors for successful businesses. If you can purchase a business that owns IP that supports your strategy and save the cost and time required to create your own, this could be a winning approach.
What IP are you developing?