Window shopping for business strategies
The business landscape is littered with disasters based on “expansion by acquisition”. What seemed like a great idea to combine two small firms to make a much bigger one often leads to a smaller one, or to none at all.
Sometimes it’s spectacular. America Online and Time Warner merged at the turn of the millennium. In 2003, they wrote down the value of their combined entity by US$99 billion. Small businesses don’t get it right either. When the “dot.com” boom ended, literally thousands of small firms went bust after basing their strategy on rolling up small enterprises with rough synergies.
Yet you only have to look around to notice that many survivors are combined entities. Virtually every major bank has grown through acquisition. Most law firms or accounting practices I knew in my youth now go under the name of some merged entity. What are the drivers behind this growth model? There are three:
- The risk can be lower – you can see if what you are acquiring is already working before you buy it.
- Access to finance can be easier – if what you are buying is already working, banks and investors are more likely to provide the money to acquire it at a reasonable price.
- Growth can be faster – rather than building a new business line or customer base, you just buy it
Why do so many fail?
The reasons are pretty much the opposite:
- Rather than focusing on what’s already working, the merged forecasts are based on untested blue sky. That’s always risky.
- Most failures can be sheeted back to paying too much.
- The need for speed overlooks the need for a cultural fit. Organic growth might be slower but it is more likely to keep a successful culture intact. Buying into a completely contrary culture is a recipe for a disaster.
Does that mean you should ignore this approach entirely?
Take a look in your own window
Investigating an acquisition is a very rewarding ways to review your business strategy. Start the process by looking not at the target but at your own business. What does it need? What does it do? How much can it afford?
Take a 360-degree view of your existing business landscape. Consider your stakeholders. Is there is a business case for merging with, aligning with, or taking over, a supplier? Or a distributor? Look outside as well – and not just at your competitors. Add wild cards in unrelated businesses to get a lateral perspective on where you could take your business.
You may already have organic expansion plans in place, but as an exercise, spend an hour considering acquisition as a real possibility. Think about your space, your competitors and your future. The end result may be that you eliminate acquisition as an option, but your understanding of your own strategy will be deeper as a result.
Buying new business lines is examined in detail in the a management book, Recharge. You can buy it online here.