Strategic Decisions - More Art than Science
Over decades, psychologists have conducted a number studies, scrutinising the strategic decision-making process of senior executives. The main conclusions drawn from these studies, are that business leaders very often make strategic decisions based upon intuition - or “gut feel” - and that the decision-making process is more of an art than a science.
This type of decision making practice is more typical of business leaders than business managers. Managers typically, like to have a robust parameters and a pre-determined structure to adhere to, whereas leaders are happy to follow their instincts. The other major difference between leaders and managers is that leaders are visionaries who inspire and have followers, whereas managers implement and have subordinates.
When analysing the decision-making process involved in making an acquisition, there are a number of issues worth pondering.
Acquisition Qualification - Poor Decisions Made by the Wrong People
As M&A specialists, Boss Equity has a good grasp of the level of decision-making demanded in making strategic acquisitions. My personal viewpoint is that in the acquisition qualification phase, the wrong information is often analysed by the wrong people, resulting in poor decisions being made.
To clarify: one of the most common complaints I hear from the higher profile organisations in our sector is that they are inundated daily, by brokers presenting companies for sale. Much of the time, they say, it is clear that, when the list was originally created, little thought was given to the strategic fit; consequently, the vast majority of these "opportunities" are non-starters.
The sheer volume of companies for sale being presented to larger organisations, provokes a variety of reactions by the potential acquirer which, although understandable, do not serve them well in identifying the very best acquisition opportunities.
· Teasers are given to "Managers" rather than "Leaders" for early stage qualification
· Managers make "safe" decisions, while "Leaders" want to make the "right" decision but will take calculated risks
· Opportunities to acquire, where the target company is outperforming the buyer, are often disregarded as exaggerated and are dismissed without further investigation
One of the informative features of gaining feedback from organisations is hearing the reasoning behind their decision not to investigate an acquisition opportunity further. This is a critical step for us as we are looking to qualify early and identify the perpetual tyre kickers from the serious buyers. Some of the thinking does make us scratch our heads in amazement at times.
"We are not interested as the revenue to head count ratio is not what we would expect"
If only M&A was that easy! Just divide the revenue by the staff and, “Hey presto!” there is the analysis. Incredible! I wish I had thought of that twenty-five years ago! DOH!
"This company is highly profitable and is performing too well for us so we have qualified out". So, what they are saying is, “Please bring us companies that are less profitable than we are as this company could make us ask ourselves some difficult questions or make us look bad by contrast.”
"We are currently extremely busy with year-end sales; perhaps we could reconsider in a few months when we are less busy". So, what they are effectively saying is, “Please come back to me when I have less to do - If everybody else has turned it down.”???!!
Although I mention the above examples partly for entertainment, there is also an implicit sub-text: there are three main reasons why companies qualify out M&A opportunities in such an off-hand manner:
1. They are not interested in acquiring but are simply being nosey and want to try and identify the company. This is something we quash immediately.
2. The opportunities are being qualified by the wrong people within the organisation. If you are serious about making acquisitions, then it is a task best undertaken by your organisation’s leaders and visionaries - not your "Managers".
3. The company does not have a system in place to facilitate effective qualification because they haven’t accurately defined their M&A Strategy.
A Finely-Tuned M&A Strategy is Essential for Success
A true M&A strategy will enable a company to quickly identify a potential fit and will also incorporate a procedure for separating the "Of interest for further investigation" from the "Not for us". However, despite assurances to the contrary from many management teams we meet, the majority of companies do not have a finely tuned M&A strategy. Yet they expect to be successful.
It's a bit like me driving to a new location in a foreign land without a map or sat nav. I would soon get lost. Who am I kidding?! I would soon get lost in this country!!!
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