The acquisition of another company is a powerful tool to execute your strategy. There are books and articles on how to do them, how to plan them, and negotiate them. There’s even a book that addresses why they fail so often, and what to do about it – The Acquirer’s Playbook! But how do we measure success? Closing the deal is clearly an achievement but that can’t be how we measure their success. The best place to start is clearly the beginning. What was the objective of doing the deal? If the answer was, to get bigger, we may have a problem.
I would argue a mixture of these reasons completing an acquisition, is going to deliver increased shareholder value and build a much more successful business over the longer term.
Reasons For Acquisitions
- Increase market share, leading to higher levels of sales, increased margins through efficiencies and an increased capacity to service your customers better. In extreme examples, often called a roll up e.g. in the insurance world HUB have grown from 11 brokerages in 1998, to over 400 today.
- To build out your technology capability quicker than you could do it yourself including capturing outstanding talent quickly to ensure you capture the market opportunity in front of you. e’g. Google’s acquisition of YouTube in 2006 for $1.65 billion.
- Increase your return on equity by deploying your capital more efficiently than it could be deployed anywhere else (Note management’s job is not to spend the budget but to efficiently deploy capital). e.g. Berkshire’s acquisition of Burlington Northern for $26.3 billion in 2009.
- Build a stronger overseas base to service your customer base and therefore get closer to those regional customers. e.g. WPP the world’s largest ad agency acquired ADK of Japan in 2008.
So your objectives should drive you to audit whether success was achieved. By the way parking measuring the success of the deal for a moment, it’s worth noting a first phase of measuring success – measuring your process using immediate post-mortems. Heimeriks, Koen H., Stephen Gates & Maurizo Zollo. “The Secrets of Successful Acquisitions.” WSJ Sept 2008 – concluded that post-mortems are a key ingredient to building acquisition expertise. As they said, and I’m paraphrasing, be careful not to confuse experience with knowledge. The number of deals you complete is less important than what you learn from each deal. Building M&A capability is about conducting in-depth post-mortems and always be learning.
Now coming back to measuring success based on your objectives, let’s review what you could measure.
- Increase market share: Important to independently validate market share gains by measuring the delta pre and post the deal. In addition regarding efficiency gains, I would take the second full year of ownership of the target to compute gains achieved match expectations.
- To build out your technology capability quicker than you could do it yourself: Again what sales figures have accrued because of the new technology capability and at what margin and does that reflect a good pre-tax return on capital deployed. I’d also want to conduct comprehensive customer surveys pre and post the deal to measure whether the customer base noticed(at least in the B2B space)!
- Increase your return on equity by deploying your capital more efficiently: One simple measure I like is to take the pre-tax profit of the target for the second full year of ownership divided by the acquisition costs plus one off post-acquisition integration costs. If an earn-out is involved, calculate the ROI% at the end of the earn-out based on total payments made.
- Build a stronger overseas base to service your customer base: Similar to 2. above, track the incremental sales from that region and margins that have accrued compared to the capital deployed to achieve it. Measure the happiness of customers you had in the region pre and post the deal.
There are many more reasons for doing deals including pure defensive plays to maintain a competitive position, to change your business model, to diversify into a brand new segment (not just add on technology). The key is to buy what you want to buy not necessarily what’s up for sale. Strategy first. Acquisitions second. Then audit your success and build an M&A capability that keeps score and learns from each deal.
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