We were asked by one of our readers what the rationale was for acquiring companies. The company they work for is currently buying up a score of companies, and they were wondering about the strategic benefits. Please read below for a couple of examples of when acquisitive growth can be beneficial for an organization.
Companies are looking for synergies of some sort – the expectation is that the performance of the combination of businesses is greater than the sum of the businesses on their own. But the benefit has to outweigh the cost. Acquisitions can add costs and constraints to the business units. Just complying and communicating with the parent has costs. So let’s look at some examples of why companies acquire:
- Building up the portfolio – primarily through acquisition, finding undervalued companies that can gain a competitive advantage from the acquisition.
Example: Berkshire Hathaway (BH) – “Buy wonderful companies at fair prices.” Warren Buffett listed the advantages of their corporate strategy. Some of their businesses are highly successful and generate more cash than they can reinvest in the business.
BH can move huge sums of money between businesses and into new ventures, instantly, with no taxes, so at lower cost than a business seeking investment externally. They have eliminated the cost of duplicating boards of directors, as well as some regulatory and administrative costs, and there are some tax efficiencies. - Restructuring – seeking undeveloped, sick or threatened organizations, or where industries are on the threshold of change. The parent intervenes, changes management, shifts strategy or infuses the company with new technology. In some instances, unneeded pieces are sold off.
Example: Virgin has stated it looks particularly at markets where the existing customers are not always receiving value for money and where the existing companies have in some cases become complacent – airlines and cell phone service for example. They aim to offer something ‘better, fresher and more valuable’ than existing companies and leverage their brand as the “consumer champion.” - Transferring skills or expertise – the business units must perform similar enough activities that sharing is meaningful, these activities must be important to competitive advantage (or will not be worthwhile), and the skills or expertise to be transferred have to be advanced enough that competitors cannot easily copy.
Example: 3M – research is shared throughout the internal research community. They live by “While products belong to the businesses, technology belongs to the company.” One example of how this is accomplished is the Technical Forum, which brings together more than 9,000 members of the 3M technical community, including theoretical mathematicians, human factors engineers, biological psychologists and scientists from around the world. This culture of cooperation, communication and cross-pollination of ideas among marketers, scientists and other employees generates enthusiasm to share technologies and best practices across 40 business units and 30 research labs around the world. - Sharing activities in the value chain – purpose is to lower cost or raise differentiation. But coordinating activities between business units imposes costs, so these activities must be significant to competitive advantage and the benefit has to outweigh the cost.
Example GE: GE’s organizational structure includes six divisions, each devoted to specific product categories: (1) Energy (the most profitable division), (2) Capital (the largest division), (3) Home & Business Solutions, (4) Healthcare, (5) Aviation, and (6) Transportation. , GE also provided some centralized services to support all its units. These support areas included public relations, business development, legal, global research, human resources, and finance. By having entire units of the organization devoted to these functional areas, GE hoped not only to minimize expenses but also to create consistency across divisions.
Dear Reader, we hope this answered your question. But of course, each of these corporate designs require a different approach to managing the organization in order to realize the full benefits.