Did You Just Buy a Company?? and: Notes from a CEO’s Desk
Hello, Judit here. I’ve been asked to put together a little book with the best of Lessons from the past few years. This book will not include any of the current punditry I do (as these can quickly become outdated) but rather a collection of thoughts, analysis and advice on the everyday issues of building and running a business, which is probably about half of what I write. I’ve started going through the archive and collecting the material with the working title “Notes from a CEO’s desk”.
Thus I have two asks, if you allow. The first is easy; if you read something that resonates with you, please drop me a comment, note or message so I can add it to the content pool.
I’m also looking for ‘beta readers’ to give me feedback on the content or structure of the book (not proofreading). If you’re an experienced leader and fancy partaking, please let me know, I would love your input.
And now, on to the main topic of business acquisitions.
While you may have heard of the Silicon Valley-type startup strategy of taking out the competition by acquiring them without any other operational aim, most companies acquire others in order to grow.
It makes sense – buying and integrating another company (or selling it for parts) is time-consuming, risky, expensive and takes senior leaders’ attention from other parts of the business. You do it if you can see it supporting your growth plans. Companies that haven’t been hyped by massive VC money usually cannot afford to buy something just to take it off the market and park the founder. (Unlike in the TV show Silicon Valley, which you should watch if you are new to the startup world. It is very funny.)
You buy a competitor, or a smaller player, or an interesting business in another industry, or one in your industry but further up or down the supply chain because you are pursuing certain growth-focused strategic goals. Such as
gaining market share,
pursuing geographical expansion,
wanting to launch new products,
integrating the supply chain for more control of quality or otherwise,
you want a new technology or know-how.
In the knowledge space, you might want to buy a company to get the people who possess the skills and knowledge. In professional services, you might want to acquire their clients.
But ideally, you’d want to acquire a company to pursue some form of growth or development. I think this is a better framing than what we used to talk to about: pursuing synergies with the acquisition or merger. Especially as these ‘synergies’ more often than not turn out to be somewhat mythical or at least very hard and expensive to realise.
There are variations on the theme of course. Such as Microsoft’s recent hiring of Mustafa Suleyman and many of his team from Inflection AI to build Microsoft AI, which left behind a shell of a company. This deal might have been done this way (i.e. not a company acquisition) to avoid any regulatory scrutiny, but maybe they just wanted a cleaner start by avoiding purchasing all the ‘baggage’ any company you buy comes with.
Because that is the thing: all company acquisitions have risks beyond problems with integration. You are acquiring the target’s past, liabilities, and potential wrongdoings – hence why M&A is a great business for lawyers and why you need to do thorough due diligence from a financial, accounting, legal, commercial, regulatory, etc point of view. Unlike what Mr Musk did with Twitter when he signed a basically binding contract at a basically binding price with no caveats and no thoughts of due diligence.
The worst-kept secret of corporate mergers is that most of them fail. (There are studies and data, it is not a gut feeling.) Those synergies one learnt about in business school too often remain elusive. Yet, CEOs continue to pursue transactions for various reasons. A side note here: don’t be too hung up on what is a merger and what is an acquisition. True merger of equals is rare and it is often fatal. Even if it is called a merger, there is usually a power imbalance between the partners and what’s truly happening is an acquisition of some kind. But let’s not be lawyerly about this.
When we talk about synergies some of these are more about cost savings than anything else. In crude terms it goes like this: Let’s combine our businesses so our revenue increases significantly immediately, and we reduce overall costs by combining (and thus overall reducing) some back office functions or supply chain costs.
And in some simple cases that works just fine. But when you have bigger and more complex businesses that might not be the case. You can create too much complexity or complications and instead of saving on operational costs you end up adding more costs, and even more annoyingly, your combined revenue might not be a 1+1=2 but rather a 1+1=1.5. The reasons vary. Some of the not-immediately tangible costs of a merger can be things like loss of key talent because of duplication of roles, turf wars and culture clashes, or simply new products eating into your own market share instead of increasing it.
You can also overextend yourself. There was a business I knew well that did a substantial acquisition that looked really good from a strategic point of view and seemed like a good fit. It was a big fish to swallow for the acquirer but they had a good handle on things. However, encouraged perhaps a bit too much by the success of the initial transaction, they saw another target six months later. This target was in trouble but it had a business division the acquirer desired. I was alarmed and voiced concerns. They were still at the early stages of the integration of the initial transaction, which was very substantial already, now they were taking on another substantial business that was in bad shape. They went ahead and sadly my warning came true. The whole combined business collapsed within a year. The new combined business was too big not to fail.
They were not the first nor the last business undone by too fast and too big acquisitions.
Executing serial acquisitions is more art than science, to be honest. And some companies, some executives, are true masters of this art. They get the targets and timing right and they go from strength to strength. Even if the financial hangover of serial acquisitions can be lasting (debt financing hello), it doesn’t have to be detrimental – as long as the revenue growth materialises and is sustained.
What you want to achieve is overall value creation but what often happens is more like value destruction. That’s why you don’t just jump into buying another company that is not minuscule compared to yours without serious thinking and groundwork, including by specialist advisors.
While there are risks, some serious and some not so much, when an acquisition works out it is transformative for the business.
So go forth and shop if you can afford to, just be clear why you want to buy that particular business and how you will integrate it.
NB: none of this is advice, just general thoughts. Always talk to qualified advisors before embarking on a transaction.