Rules to Acquire By: 3 Lessons and 6 Take-Aways

Bruce Nolop, the CFO of Pitney Bowes, has contributed an excellent article to this month’s HBR which details the process used, and lessons learned by, his company in the course of making 70 acquisitions in the last six years. In fact, the article reads like a blueprint to smart buying, and there are dozens of good take-aways--an entire semester’s course of advice.

Three lessons in particular are striking.

First, Nolop points out that much of the business press describes acquisitions as difficult and, in many cases, ultimately doomed to failure. And they are difficult to execute. But—and this is a rhetorical question--have you ever tried to build a product or business from scratch? Or, for that matter, achieve consistent, long-lasting double-digit organic growth? That’s incredibly difficult to execute as well.

So, it’s all hard. Which, as Nolop points out, puts acquisitions in the right perspective. “A close look at the world’s most successful companies reveals that, in general, they rely heavily on acquisitions to achieve their strategic goals. Despite the challenges, their managers affirm, acquisitions are faster, cheaper, and less risky than organic expansion.”

All of which leads to Schultz’s First Lesson of Acquisitions: If you think acquisitions are risky and difficult, you haven’t tried organic growth.

The second really striking insight provided in Nolop’s article is that the deal often defines the strategy. Conventional wisdom would say that is a cockeyed, backward approach. But the truth is, stuff happens in business, just the way it happens in life. Good companies know their fundamental strategy and approach to markets, but once they’re out executing, all kinds of interesting things happen.

A customer might say, “You know the salesman who was in here before you? He has a great product, and it operates beautifully with yours, but what a screwed up company he works for.” What do you think: Is that worth a $500K market research report?

Schultz’s Second Lesson of Acquisitions is: You have to kiss a lot of frogs.

A lot. You have to invite a flood of opportunities from partners, customers, employees, bankers and anyone else involved in your space. There are certainly acquisition hunts that are focused and driven from a clear defined strategic need. But those tend to be very difficult processes, because everyone knows you’re hungry and everyone plays hard-to-get. It’s the wounded eagles that you chance upon as you are working hard to grow organically that often fit your strategy in ways you could not have foreseen.

Which leads to Schultz’s Third Lesson, echoed by Nolop: “Never, ever shop when you’re hungry.”

Remember freshman year in college, placing your fifth and final call for a date for Friday night (and very late Friday afternoon, by the way)? The word to describe your situation was: pitiful. And that’s what happens when you are a hungry buyer. Sellers can sense it a mile away. Even the pace with which you return the last call is a giveaway. The right time to do an acquisition is when you are busy running your business, and the interest of the seller is at least as high as your interest in getting a deal done.

The third, critical lesson in Nolop’s excellent article is that you need to “stick to adjacent spaces.”

There are really two simple choices in doing an acquisition: adjacencies and diversification. (There are also things called “platforms” which are often fancy terms for (large scale, sort of adjacent but really) diversification. “A 2001 McKinsey study found that adjacent acquisitions correlate with increased shareholder value, whereas diversification into nonrelated areas actually reduces shareholder value.”

Nolop does an excellent job defining adjacencies, but my shorthand is simple: Do we share customers? Do we share costs? Do we share technology? If you’ve said “no” to all three of those questions, well, that’s when organic growth starts to look a whole lot easier.

And, Schultz’s Fourth Lesson of Acquisitions is: “The hungrier you are, the more everything starts to look like an adjacency.”

Again, it speaks to the underlying truth that companies with a rich strategy for organic growth get into a lot less trouble with acquisitions, and tend to ultimately be more successful when they do them.

All of which leads to Schultz’s Fifth and Final Lesson of Acquisitions: “Never, ever, ever, ever fall in love.”

I am convinced that your level of infatuation with a particular acquisition is inversely proportional to your Net Present Value.

Here are 6 more take-aways from Nolop’s terrific article:

1. In a sense, customers must grant a company permission to enter a new space. At Pitney Bowes we test our acquisition ideas by gauging the likely reaction of our existing customers. In many cases, this involves actively soliciting their input.

2. A sound approach to acquisitions is to make multiple, smaller acquisitions. One study by Bain & Company looked at deals conducted by some 1,700 firms over a 15-year period and concluded that the probability of success in an acquisition was strongly influenced by the size of the target market capitalization of the acquirer. The economic returns were greatest from acquisitions that represented 5% or less of the acquirer’s market capitalization.

3. Never let staff drive the acquisition. The leaders of business units are in the best position to gauge a potential acquisition’s strategic and cultural fit, identify potential business synergies, and establish the road map for delivering expected outcomes. They need to be sources and owners of acquisition proposals.

4. Acquisitions made to compensate for poor performance court disaster.

5. A “decision memorandum” written in plain English is critical once the deal reaches a certain point in the process. “I’ve been amazed at how many elements of a deal that seemed clear in PowerPoint can fall apart when they’re subjected to prose.”

6. Acquisitions should be managed as a process. That means mapping the complex chain of actions typically involved in an acquisition, paying attention to what can go right or wrong at different stages, standardizing effective approaches and tools, and continually improving on those approaches.

Oh, and Schultz’s First Ancillary Coda to the Lessons of Acquisitions, learned in the heat of battle, is: “If the other side slams down the phone, tells you to go to hell and never call them again on a Friday night—make the call anyway on Monday morning.”

Trust me on that one.

Posted by Entrepreneur Generations

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