"Growth is seriously challenged and business is under pressure. We need to make some inorganic moves.”
“Company XYZ, our competitor, just became double our size, through an acquisition. We must do something.”
“Country A just opened up its economy – we must acquire assets quickly, before every Tom and his uncle lands up.”
This is common lunch table conversation with CXOs in most companies across industries. M&A is seen as a quick fix out of distress or to exploit a sudden opportunity. For public companies, the glare on results quarter after quarter could create pressures particularly when the economy is facing headwinds. It is often easy to succumb to this pressure and buy yourself out of trouble.
Not surprisingly 70 percent to 90 percent of inorganic initiatives fail. They end up destroying shareholder value! Most suffer from “misalignment with the organizational strategy”, some from the CEO’s hubris and the rest from poor execution.
Organizational strategy or the Strategic Plan, one of the most important exercises that a company undertakes from time to time, articulates the company’s aspirations, the DNA under which it will operate, the environment that it operates in, the opportunities that present themselves, the business choices it will make depending on its right to win and the capabilities it has and needs to build. Business choices it will make will be around products, markets and categories. Capabilities will encompass technology, capital and people. Very importantly it will articulate boldly “WHAT IT WILL NOT DO!”
Opportunity, Capability and Timing will usually decide whether the execution will be organic or inorganic.
For example, if the strategy is to move into a new market say Brazil, and an organic path may take say more than 5 years to critical mass, a company may prefer an acquisition. Or if a company has decided that its future depends on a cutting edge new technology that it does not have the capability to build on its own — it may well decide to acquire it.
Acquisition, therefore, is a subset of a broader strategy and is a means to a broader objective. It is not an end in itself! If misaligned with the organizational strategy, its outcomes will often be suboptimal.
Is there a quick checklist of questions that one can ask before contemplating such a move? Indeed, there is:
- Is the proposed initiative, part of the stated organizational strategy?
- Are we the better owners?
- Do we have the requisite bandwidth to pull it off and integrate it?
- Can our balance sheet digest it?
If you are the head of Strategy and M&A, you are asking the above questions to the leadership team comprising of the CEO, CMO, CHRO and CFO. If the answer to any one of them is ‘NO’, then it is best to go back to the drawing board and have a tough conversation with the team.
In hindsight, if we look at Kingfisher Airlines’ acquisition of Deccan Air — what would our answers be to the above questions? Was Kingfisher, a high-end premium image offering, the better owner of a budget airline? Further, can a premium product and a budget product co-exist easily under the same umbrella, operating with the same DNA? Not only did Kingfisher destroy value in Deccan Air, it also inherited the complexity of running fundamentally two different businesses, and messed it up by running both with the same mindset.
A similar situation arose, when Tata Motors acquired Jaguar Land Rover (JLR). Tata Motors, an orthodox maker of “economy bare boned trucks” had developed a long-term blue print of getting into Passenger cars and to become a global force over 2-3 decades. It knew that it could use in-house capabilities to cater to the budget segment and started off well with Indica. But the premium segment was a different ball game. Different consumer expectations, different technical capabilities and marketing strategies. JLR was a tailor-made opportunity. But Tata wisely, did not enforce the Indica mindset and management on JLR. They left it to run autonomously by energizing it with best in class global talent from the premium segment and created enormous value. JLR is one of the top brands in China’s fast growing market!
Two similar situations, but very different outcomes!
The situations considered above are also known as ‘Transformative deal situations’. These are the kinds of deals, where the growth trajectory or even the business model of the acquirer could change dramatically post the deal. They are often very capital-intensive in nature and often have the perception of “betting the house”. As shown in the above examples, if you get these wrong, you could well sink, never to recover!
A “String of Pearls” is often a safer approach. Here you do smaller deals, in line with the organizational strategy. The risk is spread out and there is usually cross learning from one to the other that helps companies to sharpen their deal integration skills.
It often surprises first timers to see that the effort in magnitude to acquire, diligence and digest an asset, does not differ per the size of the asset. It is largely similar. More ambitious companies prefer taking larger bets.
Before you ask the Shakespearean question – To Buy or not to Buy, look at the strategic blueprint and goals!
(The views expressed here are those of the author and do not necessarily represent or reflect the views of his organization)