Done right, acquisitions create value and accelerate a company’s growth setting you up for long-term success. However, experience tells us about 77% of acquisitions fail. Deals often fall apart before they close or fail to generate their expected value. Here are three common reasons why acquisitions don’t work out and how you can avoid them.
1. Focusing on Financials
Acquisitions that are based purely on financial engineering rarely generate lasting value. Cost cutting will certainly help top-line growth, but you can only cut costs once. In the long term how will you grow revenue once you’ve cut costs? While many acquisitions do result in cost synergies from combining back office operations, this is should not be your primary reason for acquisition. Successful acquisitions are based on strategy rather than cost-cutting.
Another common mistake price-conscious acquirers make is to search only for cheaply priced companies. Often these companies are in distress, but because of the low price, the acquirer might be willing to overlook other critical issues such as liabilities or cultural issues that could affect the deal’s long-term success. While acquiring a healthy company today might seem more expensive, the chance for long-term success tends to be greater.
Solution: Strategy First
Instead of focusing on costs, smart acquirers focus on strategy first and all other factors second. Without a strong strategic rationale, you risk slipping into the 77% of failed acquisitions. Acquiring the wrong company is an expensive mistake and you would be better off if you had never done the deal in the first place.
2. Lack of Strategic Rationale
Acquirers who make this mistake tend to fall into one of two camps. Either they have no reason for acquisition or they have too many. With no reason for acquisition, you risk buying whatever opportunity happens to come along simply for the sake of acquisition and with too many reasons, you risk diluting your efforts. In both cases, without a single clear purpose guiding your acquisition, you risk acquiring a company that does not advance your growth strategy in a meaningful way.
Solution: Have ONE reason for acquisition
For each acquisition you pursue, you should only try to fulfill ONE strategic need. Trying to meet multiple needs means you may end up meeting none of them. Think about how you hire employees: if you have various positions in sales, accounting, and operations, you would hire three different people. In the same way, if you have multiple strategic needs, you should pursue three different acquisitions instead of lumping them into one deal. For achieving a profitable result, be sure to select only one reason for acquiring a company.
3. Integration Challenges
Integration is incredibly tricky to master and there are many moving pieces to consider from operations to employees to branding to suppliers to customers. There is no one fool-proof way to seamlessly merge two entities into one and even the best integration plan will have a few hiccups.
Solution: Plan Early
Overcome this obstacle by planning for integration early in the M&A process so you can anticipate challenges, develop solutions and establish a plan for moving forward. Far too often companies think of integration as an afterthought, but the reality is if you are planning for integration on Day One after the transaction closes you are already too late. On Day One, you should already have developed an integration plan and begin putting it into action. Addressing integration early on gives you plenty of time to identify problems and opportunities, develop solutions, and create your 100 day plan. The first 100 days after closing are a critical time and you must move swiftly to implement your plan in order to be successful.
While this is by no means an exhaustive list, addressing these key issues can be the difference between success or failure when it comes to growing your business through strategic acquisitions. Make sure to learn from the mistakes of others.