Before Acquiring

If you’re considering acquiring a company as part of your growth strategy, before you do so ask yourself these questions:

• How will this acquisition improve what my existing customers are experiencing?
• Am I making this acquisition to increase market share?
• Is my intent to get into a completely new market?

Here are some things to consider with each of the questions listed above.

Existing Customers’ Experience

The most successful acquisitions are those that enhance the experience existing customers get from doing business with you. Failing to evaluate a potential acquisition in this light can be devastating…as Daimler discovered after merging with Chrysler.

Daimler and Chrysler served two completely different markets. Daimler couldn’t migrate the quality and luxury aspects of a Mercedes to the Chrysler market because Chrysler buyers couldn’t afford them. Similarly, Daimler customers had no interest in Chrysler’s offerings because they didn’t provide the quality and image benefits that a Mercedes does.

Let’s contrast the Daimler-Chrysler experience with tech firms. The most successful tech acquisitions are those that give customers technology that enhances the technology they’ve already purchased. Cisco Systems was particularly adept at this.

There were several things that made the Cisco acquisitions so successful. They:

• Acquired technologies that improved the performance of their existing technologies.
• Added credibility to the acquired technology by adding it to their portfolio assuring existing customers that the new technology would perform to Cisco standards.
• Allowed the acquired company to operate as it had prior to the acquisition, thus taking advantage of the culture and creativity that made that company a worthy acquisition target.

Increase market share

Increasing market share is one of the most dangerous reasons given for an acquisition. The reason being that all too often this results in companies moving into more price-sensitive markets.

Adding infrastructure to take on customers that’ll only buy at a lower price is a prescription for failure. For it’s these customers who, when the next shiny object comes along or the economy turns down, leave. The acquiring company then is stuck trying to support a large infrastructure with low margins and declining sales.

If the acquiring company is trying to move up into higher-priced markets, unless they allow the acquired company to continue operating much as it did before…and under it’s own name, they are likely to lose the customers they acquired. The reason is that the newly-acquired customers aren’t going to be interested in what they consider inferior offerings. It would be like hanging a Chrysler sign on a Mercedes dealership, then wondering where all the customers went.

New market

Using an acquisition to enter a completely new market is as dangerous, if not more so, than increasing market share. The lack of familiarity with the market, what customers value and how much they value the various aspects of the acquired company’s offerings, makes growing your business this way very dangerous.

There’s a reason why there are so few conglomerates left and why those that still exist have sold off some of their businesses. It’s very difficult to manage a highly-diverse portfolio of companies. It’s the reason why analysts employed at mutual funds specialize.

Takeaways

Growing through acquisitions can be very effective, but you have to know what questions to ask AND you have to be candid with yourself when answering them. The questions listed at the beginning of this post are designed to help you do both.

Your most successful acquisitions will be those that complement what you already do AND enhance your existing customers’ experience. Penske is a classic example of how a company can stay true to its roots and successfully expand into related markets. Enterprise is another example.

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