Jay Heilbrunn: Successful Acquisitions
If acquisitions are so great, why do so many fail? Here's why.
As the economy continues to improve, distributors are becoming more aggressive acquirers. At the same time, many distributors, who believed their businesses were devalued during the recession, are realizing that now may be the time to create a change of ownership, before this up cycle runs out of steam. As a result, The Distributor Board is currently seeing more transaction activity compared to
the past several years.
As we see these transactions taking place, why are we concerned? One of our observations, along with many others, is the high failure rate of acquisitions. Some have said that 50 to 70 percent of all acquisitions fail, at all company size levels. An article in the March 17, 2012 US News and World Report stated:
“According to most estimates, about 70 percent of mergers and acquisitions fail to live up to expectations. Layoffs are common, culture clashes are the norm and workers often abandon ship. One study found that in the first five years after a merger, companies typically lose about 10 percent of their value.”
Why do acquisitions take place to begin with?
- Companies want to increase sales faster than they can do so organically
- Often a company is seeking to grow its market share
- One of the goals may be to access new customers or expand into new geographic markets
- Adding on complementary products and/or services
- Acquiring unique technology or other improvements
- For public companies, one of the goals may be to improve shareholder value; however, this may be the objective of private ownership as well
- Acquiring new management talent or employees with unique skills
- Margin improvement with higher margin products or through lower costs
- Better utilization of facilities or obtaining expanded space
The list goes on, however, the key goal is to be farther ahead after the process than before.
Why do acquisitions fail?
Why then is there such a high failure rate with acquisitions? There are a lot of reasons, a few of which include:
- Often buyers overpay for the company
- The seller may mentally “check out” after the transaction
- The expected synergies of the acquisition may be over estimated
- The cultural differences are not accurately identified or successfully addressed
- Leadership styles may clash and never be resolved
- Compensation and incentive programs may be misaligned between buyer and seller
- Lack of a clear plan for the business
- Systems and technology conflicts
- Abrupt cost-cutting can cause severe disruption
All of these and more can be overcome by successfully planning the integration process. Done well, this can build great value into a business and create the 1+1=3 goal that most have when they set out on an acquisition path.
What does a successful acquisition integration template look like? There are many ways to go about the process, however, at The Distributor Board we recommend the following:
Step One: Appoint an integration facilitator. This may be someone within the company, or if none is available or capable, an outside consultant can fulfill this role.
Step Two: Develop a deep understanding of the cultural differences between the
organizations and set in place a process to resolve these differences.
Step Three: Evaluate all of the organizational disciplines to determine the strengths and limitations of each area within both companies. For distributors, some of these include:
- Sales and marketing
- Vendor relationships
- Warehouse operations
- IT systems and technology
- HR policies, including compensation and incentive programs
- Finance and accounting
Step Four: Develop a plan which describes how each discipline is going to be addressed. For each include:
- Responsibilities and individual roles
- Action steps and timing
Step Five: Communicate the plan to the entire organization, including an organizational chart, which will help everyone understands their position and role in the new company.
Step Six: Develop and implement a communications plan for customers, suppliers
and other stakeholders.
These six steps are critically important if you want to improve the likelihood of successfully integrating an acquisition into your company. Most companies do not follow a well-defined plan. Some start off with the best of intentions, but then they get derailed due to competing projects. Goals are often not stated. Frequently, the staff of the organization struggles to understand where they stand, if they will have a job next week, what are their new roles, what the new company leadership wants and how they should best assimilate into the new organization.
At The Distributor Board we understand the value of the integration process. Most importantly we understand how it adds value to a distributor’s business! We look forward to helping you acquire and successfully integrate your next company. CS
M. Jay Heilbrunn is a partner with The Distributor Board, which builds value for distribution companies through expertise in planning, sales, marketing, M&A, organizational development, information technology, warehouse operations, sourcing, logistics and transportation. Principals are: M. Jay Heilbrunn, David Panitch and Herb Shields. Web site: www.TheDistributorBoard.com. Contact Jay at (847) 579-9185; e-mail: