Strategic acquisitions

In the acquisitions game, my preference has always been to focus on strategic value. I am not talking about making a few people redundant because of overlapping operations or squeezing some costs out through economies of scale, but genuine new incremental revenue which is gained by leveraging off an asset or capability acquired in the purchase.

Too often acquisitions are justified on simply getting bigger by combining business units rather than gaining significant growth by acquiring some asset or capability which provides a positive impact on competitive advantage.

Growth is fundamentally fueled by competitive advantage, especially in products or services which provide solutions to compelling needs. However, most firms are constrained in their capacity or capabilities to take advantage of market gaps. Either they have an outstanding solution but lack the capacity to take advantage of it or have the capacity but lack the capability to exploit what they have.

The acquisition strategy of the former should be on acquiring capacity such as people, facilities, distribution channels or cash. The acquisition strategies of the latter should be focused on buying in products, processes and intellectual property assets which can be supported by the capacity resource.

The aim of a strategic acquisition should be to enable the acquirer to do something on a much larger scale, which results in a kick up in growth beyond the mere summation of the existing revenue growth of the combined entities. By definition, a strategic acquisition should change the acquiring business, not simply add more of the same.

In developing an acquisition strategy, a company that wants to increase its growth rate should address those constraints which are holding it back. The business should target potential acquisitions where it has the capability to successfully undertake an acquisition which removes those constraints. While additive acquisitions are useful, they fail to provide the thrust that a good strategic acquisition can. They can add to revenue and often deliver some scale benefits, especially in services functions, but they don’t have the effect of significantly changing growth potential.

What is often forgotten is that strategic assets and capabilities can often be acquired from relatively small firms. If you are looking for innovation, this is often where they are to be found. If you need capability, then acquire them incrementally. Small is easier to absorb and less risky if it goes wrong. Often a strategic acquisition is simply about getting something you can readily leverage to create size organically rather than buying size.

I prefer to look at acquisitions which will return a fivefold or better return on the investment. The major advantage is that, given that some things will go wrong, I should still end up getting a two to three times return. If I aim to get 15% or 20% return on my investment and something goes wrong, the chances are that I will end up with a negative return. The advantage of strategic acquisitions is that they have considerable upside in them if they are done right and often limited downside.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.