“There ain’t no bargains,” and “You get at most what you pay for.”
Successful acquisitions are based upon business plans, not financial analyses. Acquisition targets must fit the business strategies of the acquiring company; otherwise, the acquisition is likely to fail. The worst acquisition record of the last decades of the twentieth century was that of Peter Grace, the longtime CEO of W. R. Grace. He was a brilliant man. He set out in the 1950s to build a world-class multinational through financially-based acquisitions. He assembled the ablest group of financial analysts and had them scout all over the world for industries and companies with a low price/earnings ratio. He bought these companies at what he thought were bargain prices. The financial analysis of each Grace purchase was impeccable. But there was absolutely no business strategy.
By contrast, one of the most successful examples of company growth based on acquisitions was the one that underlined the stellar performance of General Electric during the tenure of Jack Welch as CEO from 1981 to 2001. The largest single cause of the company’s growth in sales and earnings—and the resulting rise in the company’s market value—was the acquisition-based expansion of GE Capital. Of course, not all of them panned out. In fact, there was one major failure, the acquisition of a brokerage firm. But otherwise the GE Capital acquisitions seem to have worked out magnificently. Underlying practically all of them was a sound business strategy.
ACTION POINT: Think through an acquisition made by your organization. What was the basis of the acquisition: strategic or financial? How has it worked out?
The Successful Acquisition (Corpedia Online Program)
* Source: The Daily Drucker by Peter F. Drucker