Predator or Partner? Different ways to think about M&A ~ Brand Mix

Thursday, January 7, 2010

Predator or Partner? Different ways to think about M&A

Photo: Risk! by geoftheref (Flickr)

Here's one view of mergers and acquisition. In talking about M&A opportunities, The Boston Consulting Group says that companies must analyze their position to ensure that they are prepared for the coming economic upturn.

"A good one-fifth of all companies will be 'predators' that are ready for acquisitions, while another one-fifth will be 'prey'--unless they take radical steps to survive" (my emphasis).

In this view, there are winners and there are losers. Very Von Clausewitzian, very aggressive, very competitive. And if your goal is to eliminate competition, reduce costs by combining assets and control everything from HQ, and if your intention is to quickly absorb an acquired company, throw out the executives and give it very little operating autonomy, maybe appropriate.

Still, it's a troubling fact that most acquisitions don't work. McKinsey & Co. has estimated that nearly 80% of mergers don't even earn back the cost of the deal itself and there are many other studies that suggest that most mergers don't create value for shareholders.

Prashant Kale, Harbir Singh and Anand P. Raman suggest that there may be an alternative approach to acquisitions that is kinder, gentler and, in many cases, more likely to succeed. They call this approach to acquisitions: "Partnering" and it's the preferred approach of emerging multinationals like Tata Group and Ülker (a Turkish group that acquired Godiva).

Writing in the Harvard Business Review (gated), they describe partnering as: "Keeping an acquisition structurally separate and maintaining its own identity and organization. The acquirers retain the senior executives, particularly the CEOs, of the corporations they buy and give them the same power and autonomy they used to enjoy." 'What's the point in that?' the Von Clausewitz in you may be asking.

"By doing so," say the authors, "emerging multinationals are able to manage acquisitions' organizational drivers in a non-threatening way, reduce the unintended consequences of integration, and create an environment in which companies can easily share knowledge and best practices."

Partnering does not mean that the acquired company is left completely independent and alone. Those following this approach look for natural synergies, focusing on activities that can be coordinated to yield cost savings or revenue enhancement without disrupting core businesses. Things like raw material purchases and sharing best practices.

It's not that surprising that partnering has become the preferred approach for emerging multinationals. As they expand their footprint into new markets, they are buying companies that own powerful brands, state-of-the-art technologies and strong management teams. They are not making acquisitions to slash and burn; they are acquiring to grow and learn.

But, as the authors point out, it would be a mistake to dismiss the idea of partnering as something that only makes sense for these companies. As the authors point out, a similar approach has been adopted by Disney to get the most out of its Pixar acquisition and by Amazon with Zappos.

Partnering isn't for everyone or for every occasion. Companies with strong command and control, centrally managed organizations and cultures won't be willing or able to adapt to this model. Companies that are trying to build a single, global brand to serve the needs of global customers won't find the model that useful.

But, for companies that can take a longer term view, are tolerant of risk and ambiguity, have experience of similar business relationships (like strategic alliances and joint ventures), the partnering approach should be an attractive option. It holds out the possibility of succeeding with acquisitions where so many currently fail as they are beaten down by the disruptions of merging separate operations and the collapse of organization morale, challenges that are often drastically underestimated in the thrill of the hunt.

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