Reasons Why Acquisitions Fail – 1. Flawed Business Logic


In my posting on 17 March 2013 I said that I would review and comment on Denzil Rankine’s  – 20 reasons why Acquisitions Fail

Rankine says that the reasons for failure fall sequentially into the five phases of an acquisition:

  1. Flawed Business Logic
  2. Flawed Understanding of the New Business
  3. Flawed Deal Management
  4. Flawed Integration Management
  5. Flawed Corporate Development

This article examines the first category in the list.

1. Flawed business logic

Acquisition is clearly a high-risk strategy. It can offer a path to immediate, massive or even sustained growth but often the egos of those involved can lead to critical questions being passed over as irrelevant, boring, or too simplistic to be properly and thoroughly addressed.

1.  Is the target firm being acquired for the right reasons?

If the acquiring firm is not well managed, well balanced and strong enough to handle the integration of another firm one must examine the reason for making the acquisition. An acquisition puts a substantial strain on the people, financial and processes of an acquirer. Difficulties on the home front cannot be solved through acquisition. After all, if you are making a hash of managing your firm now, increasing the management burden by the addition of significant change agents isn’t going to make it any easier.

2.  Clarity of strategy

What are your desired outcomes? How will the acquisition deliver those outcomes? What are the risks? How do you intend mitigating those risks? If you cannot answer these simple questions easily and with alacrity your strategy needs to be clarified and restated. Everyone involved in the acquisition must be aligned with the strategy for it to be assured.

3. Buying for Buying’s sake

Just because the target firm is available does not make it a good reason to buy it. Some firms are aggressively acquisitive. Their strategy fails when post acquisition integration fails because there is no clear reason for the acquired firm to be part of the firm.

4. Failure to consider the alternatives

Acquisition is one way to grow your business. However, there are other ways. Can you reach your goals through organic growth or joint ventures? The cost of acquiring a company is often much smaller than the cost of integrating it into your firm. You may find that overheads increase significantly, allowing your competitors to take market share through lower pricing points.

Before starting an acquisition strategy it is imperative that you examine your business logic, make sure you are acquiring the right firm for the right reasons rather than simply being opportunistic… and remember to consider the alternatives as they may offer a simpler, lower risk path to the same goal.

About Peter Borner

Peter is an entrepreneur and successful business leader. Currently leading a consultancy firm specialising in technical diligence for M&A and advising global firms on IT consolidation and migration to consumption based costing through the use of Cloud Technologies.

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