In the past few months you couldn’t help but believe the easiest way to grow your business is to go on a mad acquisition spree.
After all, that’s what the big boys are doing, as shown by media agency Thomson’s bid for Reuters, and US aluminum provider Alcoa’s offer for its Canadian rival Alcan.
The reasons for this merger mania vary but if you’re a small company, this strategy can make sense. If, for example, you are in an area of the market that has negligible growth, you can easily find your operational gearing in decline, leading slowly and inexorably to extinction.
It is here that the benefits of a merger come to the fore. A smartly judged takeover can present an opportunity to cut costs at every level and, if you’re number one in the market after the deal, increase prices.
Find the right market
Acquisitions often work when you are operating in a highly fragmented market. At Computer Software Group (CSG), we found this in the software market for not-for-profit companies like charities and trade associations.
There was something like 12 separate companies serving a market of some £70 million in total. The problem was that each company competed against the others, often in areas where their products were not appropriate.
Heavy discounting became the norm. To a degree, customers lost out because there wasn’t enough profit to encourage companies to re-invest in new product development and first-class customer support.
So at CSG we identified an opportunity to consolidate the market and, in the space of a year, we acquired six of the 12 companies in the sector.
Despite being told that we would end up competing against ourselves, we found a surprisingly small amount of overlap. This was achieved by being strict with our respective sales forces – focusing their strengths so they didn’t chase everything – and concentrating on product positioning and marketing.
Being the top dog
Another advantage of being a market-leader is that you are generally involved in every major new tender by default. In other words, the market knows they have to approach you if they want to get a proper view of what is on offer and how it is priced.
There are substantial savings on sales prospecting and marketing costs to be had. In many cases we had two or more of our companies tending for the same deal.
Buyers are certainly not missing out in terms of competitive products. The products are the most relevant and focused and suppliers don’t tender for the sake of it.
Those are the positives of takeovers – but what about the problems? For sure, there are the usual issues that can arise through poor due diligence or getting so caught up in the takeover that you forget the day job. Of course, this assumes that you haven’t overpaid in the first place.
Provided you have your wits about you these difficulties are avoidable. As always, the really tough problems tend to revolve around people.
If you are not careful, you lose key individuals, often to competitors, and quite quickly your acquired company looks a lot worse.
Whatever you do, make people your absolute priority during the negotiations and be sure that you look after them properly going forwards.
You should also interview all the second-tier management. These are the future stars who are too often ignored under the old management. Consider how you will motivate them properly and you will be surprised by how valuable they can be in the future.
Growing from the inside
It should be remembered that organic growth could also augment the value of your business. You will probably say that your ability to grow depends on the market in which you are operating and your relative competitive position.
The right place and the right time, you might say. This is too simplistic.
I am constantly amazed by the way companies in mature markets generate fantastic growth by innovation. There are many examples, such as Burberry in fashion, Toyota in cars and Nokia in mobile phones.
There is no doubt that if you achieve sound growth, the value of your company increases enormously. Yes, there’s a price to pay: the costs involved have to be written off in your P&L account and you have no guarantee of success, however much you test the market beforehand.
But there is a range of techniques you can use to limit the downsides:
- Don’t build too fast. Try and form partnerships and keep your infrastructure costs as flexible as possible.
- Use product line profitability to see if you have some strong but under-invested areas to which you can add investment. This is often because the sales are small relative to the core business or the business model needs to be changed to let the area grow: rental programmes rather than outright sales might be an example.
- Use strong budget control and make sure you’re conservative with your sales projections. Remember that things always take longer to gear up than you think, so be careful with your cash.
- Last but not least, overseas expansion is intrinsically more risky than staying at home. If at all possible, try to get a foreign national involved in the business; someone who is reliable and knows the local market from the inside.
So there you have it: the holy grail of strong organic growth backed up by intelligent strategic acquisition.