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How to plan to make a successful acquisition

One of my company CEO’s recently described his rule for acquisition success, and it resonated with me as a great goal for planning during acquisition exercises.  This CEO states that he has made it work twice when acquiring companies, and that is enough for him to make it his rule for all future acquisitions.

If the target company is able to show a ten percent EBITDA (earnings before interest, tax, acquisitionsdepreciation and amortization), then the acquisition team should be able to create a way to make the resulting acquisition yield forty percent EBITDA after re–engineering the combined entity.

That’s quite a goal to achieve.  But there are obvious and not–so obvious ways to make it happen, even if over time.

Dual layers of senior management remain only during the transition period and transfer of institutional knowledge from acquired to acquirer.  The best performers from the acquired become candidates to outrank or replace their counterparts, showing that a business combination is not all one–sided.

[Email readers, continue here…] Accounting and HR operations are combined as quickly as possible, as are customer service call centers, retaining specific product skills on the front line from the acquired company.  R&D efforts may remain separate for a period or forever, but R&D management is consolidated as soon as possible to avoid territorial disputes and retention of inefficient development processes.

Sales organizations may or may not be combined, but senior sales management is consolidated so that commissioning, territorial management and product management functions all harmonize.

Facilities may become redundant or oversized after these efforts, allowing for consolidation of facilities as well.

If we follow the reasoning of our CEO who proposed the rule, we can drop an additional 30% of the net revenues (after cost of sales) from the acquired company to the bottom line.  Not a bad goal, and certainly not a bad result.

  • Dave, I would add that this approach works best when 1) the buyer has expertise in the acquisition’s market and technology, 2) companies share similar cultures, 3) integration is a top level activity at buyer, and 4) acquisition half the size of buyer. Historically better than 70% of acquisitions fail to achieve an increase in valuation of the combined businesses. Those companies that regularly make acquisitions of smaller companies with similar cultures tend to get the most out of integration savings. The reason for making the acquisition is also a big factor. Buying complimentary technology (e.g. Google purchase of YouTube) is a better strategy than buying up market share (HP purchase of Compaq). While cost savings synergies can enhance an acquisition, the way they are implemented is critical. Forcing synergies between sister companies is usually a disaster. Even small changes can alienate management and erode value if acquired management feels they no longer are in control of their operations.

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