Join Anil Gupta for an in-depth discussion in this video Growing through acquisitions, part of Designing Growth Strategies.
- Acquisitions are one of the three mechanisms through which a company can fill the capability gaps when deciding how to enter new market spaces and grow the business. The other two mechanisms are building the needed capabilities from scratch or getting access to them via strategic alliances. As examples of the role of acquisitions in helping a company grow, look at Google, Android and YouTube.
Started out as units of Google via acquisitions. Similarly, Facebook has expanded its share of the social media space by acquiring several companies including Instagram and WhatsApp. Notwithstanding the importance of acquisitions as one leg of a company's growth strategy, research tells us that the majority of acquisitions fail to create shareholder value for the acquirers.
The reasons are twofold. Acquirers often overpay for what they buy, and they mismanage postmerger integration. What should a company do to avoid overpaying for an acquisition? The answer lies in being driven by logic rather than ego and strategic clarity about why and what you want to buy, and the courage to walk away if the price becomes too high.
Microsoft's 2013 decision to buy Nokia's smartphone business is a classic example of what not to do. There was almost nothing that Microsoft needed from this acquisition. Not the brand name, not the operating system, not any manufacturing facilities, and not even market share, which was declining rapidly like a falling knife.
Yet, under previous CEO, Steve Ballmer, Microsoft paid over 7 billion dollars for this acquisition. In 2015, less than two years later, the company wrote off the entire sum. What should a company do to manage postmerger integration well? The answer lies in thinking like a neurosurgeon rather than like a butcher.
What parts of the acquired company need to be preserved, nurtured, and scaled up? What parts need to be restructured and then preserved? And what parts need to be either shut down or consolidated into the acquiring company's operations? Each of the three parts requires a different approach to integration. Those which need to be preserved and nurtured should be handled with kid gloves and protected from the corporate antibodies.
In contrast, restructuring and consolidation should be carried out speedily during the early honeymoon period. As in the decision to buy, in managing postmerger integration also, it's wiser to let strategic logic dominate over ego. In some cases, it may even be better to abandon one's own brand name in favor of the acquired company's brand.
For example, after NationsBank acquired Bank of America in 1998, the company's board decided to ditch their own brand name in favor of the acquired company's. Similarly, after acquiring AT&T in 2005, the acquiring company, Southwestern Bell, changed its name to AT&T. To sum up, acquisitions can play an important role in helping fill the company's capability gaps in its growth strategy.
It's important, however, to watch out for two potential pitfalls. One, avoid overpaying for the acquisition. Two, manage the postmerger integration well. Most important of all, let strategic logic, rather than ego, drive your decisions.
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- The growth imperative
- Identifying opportunities for growth
- Assessing and choosing among the growth options
- Implementing the chosen growth strategy
- Organizing and leading for growth