Strategic Approach To Acquisitions

The history of acquisitions shows that many have been unprofitable investments. According to a study by Michael E. Porter, of more than 2,6000 acquisitions made by thirty-three major U.S. companies from 1950-1986, more than half of these acquisitions were subsequently divested. What, then, can be done to make the acquisition process more effective?

According to H. William Ebeling and Thomas L. Doorley, the essential elements of an effective acquisition process are:

  • Stating the firm's strategy. An effective acquisition process flows from a sound strategic planning process. The process must be active at both corporate and business unit levels to produce the necessary background for a sound acquisition program.
  • Developing acquisition criteria. The criteria should include:
    • an upper limit on the scale of the acquisition;
    • industries that can't be considered due to the biases of senior management;
    • broad activity / technology / skill base definitions where synergy might be found.
  • Eliminating inappropriate sectors. Using the established criteria, a broad scan of the economy should made to eliminate unacceptable industries. The most important criterion to apply correctly is the one covering synergy with some activity, technology, or skill base.
  • Screening for promising sectors.
  • Selecting promising candidates. The focus should be on two factors: activity/technology skill base position and predicted financial performance.

In general, acquisitions can be an effective way to improve the competitive position of a company and create value for both the stockholder and society at large. To do this, a company's acquisition process must:

  • Shift emphasis away from current financial performance and place far more emphasis on competitive dynamics and the structural positions of potential candidates; and
  • Be part an effective overall, ongoing strategic planning process.

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Corporate-level Strategy
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