Sunday, February 19, 2006

M&A In Dim Light

“What are you doing?” asked the stranger to the man, who, lit by a streetlight, seemed to be closely inspecting the sidewalk.

“Looking for my watch,” said the man.

“How long ago did you lose it here”, asked the stranger, starting to help the man search.

“About thirty minutes ago, I guess,” replied the man, “But I didn’t lose it here. I lost it about three blocks that way,” said the man, as he motioned down the street.

The stranger stood up and turned to the man. “Then why in the world are you searching here?” he asked.

“The light is better here.” Replied the man, confidently.

A colleague tells me his company purchased another, smaller rival recently, which on the surface seemed like a positive move as it had been clear for some time that the market they were in was leveling off, even declining.

“So, what do they do?” I asked, expecting to hear about the extension the company now had in the way of offering a new, larger; or perhaps smaller but profitable niche, market.

“Same thing as we do. Same thing”, my colleague shrugged.

“No promising IP (intellectual property)?” I asked. “No vertical markets, new distribution partners, nothing?” I offered, hopefully.

“No, not really. We lost a few deals to them before. Same customers.” He was beginning to see my point. “We’ll just be bigger.” He sighs. “For awhile.”

So it is, another company looking for inorganic growth where the light is better. A market they know, are familiar with, regardless of whether it’s a good fit, because it will, for a time, stave off inevitable decline. To this type of management, to do the right thing - to take on an ancillary product line or enter a new market, is a seen as a bit like dusk… uncertain and just a little spooky. However, I prefer to think of it as a bit more like dawn, as dim and uncertain as dusk, but with far greater promise.

This is a critical difference between management and leadership. My colleague’s company is managed, not led. Leadership would search the right places for something worth finding; whereas management will limit its searches to that with which it is comfortable. When it comes to M&A, competitors and partners are often the first targets (or buyers) that come to mind – vertical integration comes easy. In fact, almost half of such deals are from the sellers' same industry. However, these tend to be strictly buyers seeking financial leverage, and are unlikely to invest significant amounts of additional capital to grow the market or build further on foundations of organic growth. This leads to internal strife and eventual disintegration of even the most modest goals that spurred the initial interest. This is among the reasons most mergers fail. On the other hand, premium buyers, with visionary leadership in place, like many big public companies, invest in potential and pay for it, or alternatively, well-led micro and mid cap companies market themselves to these ideal suitors.

When seeking inorganic opportunities for selling your company or in buying another, be certain of your motivations and goals for the transaction.

And bring a flashlight.

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