In 2018, the value of mergers and acquisitions reached $3.8 billion worldwide. In spite of political and economic uncertainty, there are strong signs of continued success for M&A deals in 2019.
And it’s not hard to see why. Most companies follow a standard life cycle that takes them from introduction to the market at the company’s inception, through a growth period before they reach maturity. This point typically signals the start of a decline.
For most businesses, their average growth rate tops out at around 15 percent. If a market is going through a growth period, perhaps this will accelerate. But it times of decline, businesses must look to take market share from a competitor to retain anything like this level of growth.
For businesses looking to stave off their decline phase or maximize their period of growth, acquisition is an essential tool.
US firm Dodson Property Management was founded in 2007. Up until the year 2013, they achieved successful organic growth until they were managing around 1,000 properties. After this growth phase, the company struggled in any attempts for further organic progress. In 2016, in a bid to scale up, the business acquired CoreRVA. This acquisition added a new type of property to their portfolio, delivering the growth they had been seeking but unable to achieve within their own niche.
The move instantly boosted their number of managed properties to 1,500, which of course affected shareholder value and profits almost right away. Post-merger, Dodson’s portfolio has grown to around 2,500 properties. In this instance, acquisition staved off the acquiring company’s decline phase and vastly reduced the time frame needed for additional growth.
Why target acquisition?
Dodson turned to acquisition to push for company growth beyond their niche. But there are several reasons a business may plan acquisition into their strategy. It’s about identifying what the business needs to grow and the best way to achieve this.
For a business looking to enter a new product market or sell in a new geographical location, acquisition is a quick strategy to achieve this. With a new business on board, the purchasing company acquires instant market share, existing customers and infrastructure.
Between 2010 and 2013, IBM acquired 43 companies intending to use IBM’s global sales force to sell their products. With their existing infrastructure and market access combined with these new products, they were able to accelerate the revenues of the acquired companies by 40 percent in the first two years.
Two businesses on a more level playing field can still benefit hugely from a strategic acquisition. Proctor and Gamble and Gilette each had strengths in different markets. Following the acquisition, their new products were successful in new markets more quickly with the support of the other brand.
When a new technology or niche product reaches the market, it can be quicker and cheaper to acquire a company that is already offering the product in question rather than develop a rival version.
Apple has a famous acquisition strategy that has seen them take on some of the more cutting-edge technology on the market. In 2010 the company acquired Siri rather than develop the automated personal assistant technology for themselves.
Increase output and efficiency
Some M&A activity aims to achieve cost savings as a result of economies of scale. When two companies that possess similar logistics combine, the result is a more streamlined, productive and efficient business model.
When alphabroder, a maker of branded apparel, acquired Prime Line, a maker of branded hard products such as pens and notepads, efficiency was one of the benefits they had in mind. The acquirer was able to offer a more comprehensive range of branded items to their customers, whilst streamlining the order and delivery process.
The final reason behind acquisitions is to remove the competition. If a target company is perceived to be a threat, acquiring them will give a competitive edge, increase market value and market share. For example, when Kraft acquired Cadbury’s, they wiped out a significant competitor and gained the ability to move into new markets and new product categories.
What are the benefits of an acquisition?
As a means for growth, acquisition has many benefits.
Compared to organic growth, acquisition is a fast way to scale up a business. You have instant access to new resources and competencies that your business alone may be lacking. And the new product lines, new markets, and new customers are yours right away.
The acquiring company stands to benefit from an existing reputation and long-standing customer base. Compared to the organic growth of a new business, this is highly beneficial in terms of rapid growth.
Acquisition is a relatively inexpensive way to achieve growth. The existence of everything from talent to production to logistics enables speedy growth, but it also saves money.
Add to that the savings available as a result of new efficiencies. With one marketing budget, one delivery setup and one management team, there are savings to be made in almost every area of the business. Also, as a more large-scale enterprise, the acquirer will benefit from improved purchasing power and scalability.
With no new products to develop, or new markets to try out and potentially fail in, acquisition is a less risky way for businesses to achieve growth. Plus, with added diversity in the portfolio, the company will be better prepared to weather those more tricky trading periods.
By increasing market share through acquisition, some businesses may be able to outrun their competitors entirely. At the very least, competitors will be caught off-guard and forced to reassess their strategy. An acquisition can improve the reputation and value of a business within the market thanks to their increased portfolio, size and power.
Along with the acquisition of a new company comes new team members, bringing with them years of expertise in their field. Senior executives would be wise to make the most of the huge increase in skills, knowledge and insider intelligence from the acquired company post-merger.
As well as funds, acquisitions open the door to new facilities and technology which can be factored into decision-making for future business growth.
Risks of acquisition
As with every business decision, acquisition is not without its risks. However, the application of due diligence in setting out a thorough and detailed roadmap of the acquisition process should ease concerns as companies enter into the acquisition process.
As with any major change, the success rate of acquisition is not guaranteed. There is a chance that the gamble of acquisition may not pay off. The reasons for this include if the acquisition price is too high, the process takes too long or results in the loss of staff or customers
In particular, hostile takeovers can become very expensive. The acquisition project team must set out budgetary constraints from the outset to mitigate as much as possible against unforeseen circumstances in terms of cash flow.
Perhaps the most famous risk to a successful acquisition is the clash of corporate culture that may occur when two businesses collide. Senior leaders play a huge role in managing this major change from the top down. Cultural differences must be identified and planned into a new culture which is communicated to employees via a thorough change program.
Talent management should also be overseen by senior executives, ensuring that productivity and efficiency are not sacrificed, and high-performing individuals are taken care of.
It is not only the staff that can cause friction during organizational change. The infrastructure of the business is at risk of causing acquisition to run aground. From administrative setup to cybersecurity, management teams need to plan for the successful integration of every aspect of the business. Failure to pay staff on time, breaching employee data laws and in the case of international expansion, errors in handling local payroll regulations are all mistakes which could cost a company a successful acquisition.
When the managerial focus of a company shifts to acquisition, it is sometimes the case that other issues and opportunities are missed. Outsourcing crucial infrastructures such as payroll prevent this from happening particularly in expansion on a global level, enlisting dedicated teams to oversee the day to day processes.
Acquisition: successful change management
Perhaps more than any other organizational change, effective change management is crucial to make acquisition a success.
The change management team must effectively assess the company culture of the new company and work out how to assimilate it into their own. Asking questions such as how is productivity measured, what does success look like and how are employees rewarded are the first steps in ensuring employee engagement does not take a nosedive.
Technology and data must be reviewed. How will the two IT systems communicate, or will a new system be required to cover the work of two legacy systems. Where will two separate business units become one and where will the two work alongside each other.
The most important aspect of the change process is in the strategy. From deciding which businesses are appropriate acquisition targets to understanding the minutiae of how the acquisition will be managed to finally what will happen once the acquisition is complete. Preparation, research, and careful planning is the only way to avoid the risks and pitfalls involved in an acquisition.
From the perspective of Human Resources and Finance, a global payroll software provider can take a weight off. Adept at handling acquisitions of every shape and size, they can integrate conflicting systems, migrate legacy data and establish a new system that works for the new business. Fully scalable, global payroll software will smooth cross-border expansion, offering local expertise and streamlined global processes to give your acquisition the best chance of success.
To learn more about how Payslip can ensure successful acquisition from a payroll point of view contact us today.
For more information about local payroll provider partners contact Payslip today