Perspective on the Art of Mergers and Acquisitions

Last week, H.J. Heinz was purchased at a 20 percent premium of the stock price. Heinz, another “unexciting” business that does nothing but make money, was the latest addition to a long list of Warren Buffett’s (Berkshire Hathaway) brand-name companies. Look at this partial list:

  • Geico
  • Dairy Queen
  • See’s Candies
  • Fruit of the Loom
  • Benjamin Moore & Co.
  • Business Wire
  • NetJets

Unlike other firms that buy companies and then change the management team, the leadership, the culture — all in an effort to improve the business — Buffet does something entirely different. He buys sound businesses with an upside and doesn’t make the typical changes. Buffett often actually lets the existing management team run the business it knows so well, with little interference from him. It’s simple, and an anomaly in the culture of corporate acquisitions, but it works. That’s why Buffett is the Oracle of Omaha.

But he doesn’t get enough credit for the types of companies he buys outside of them being financially viable businesses. He makes sure the companies keep their brand names intact. That’s huge.

Most executives who want to acquire a business don’t have the same mindset as Buffett. It’s hard to resist the urge to get involved and make changes in order to improve the company and improve returns for you, your shareholders, or both.

And that’s fine, if you do it right. But never discount the brand of the business you are buying. Here are questions you should answer yourself before any acquisition:

  • Does the business have some poorly functioning lines of business or divisions?
  • Is the company a “known” brand?
  • Can you keep the name of the company indefinitely?
  • If acquiring a product-based business, are the products almost “timeless,” and can processes be repeated consistently to ensure a high rate of return on equity?

If the answer is NO to any one of these, you probably should find another acquisition candidate. Let me elaborate:

  • Repeat after me: Do not buy a business that you cannot improve. These types of companies offer the greatest reward for any buyer. A company that already is great should be considered low-reward, especially if the current leadership team is not going to be around for a long period of time.  Smart executives look for ways to improve the sales function, marketing, finances, and cost structures of any business they acquire to drive results.
  • Is the company known to many? Having an instant brand that you acquire is something to place a premium on. Already having a brand name in the marketplace you serve is a tremendous asset for any acquisition. Too many companies fail to tap into the brand equity of the companies they buy.
  • If you buy a product-based organization, make sure you understand how long those products will last and that there remains a growing market for those products. Think like Buffett. Among his stockholdings are companies that will never go out of business and will keep making money: Coca-Cola, Anheuser-Busch and American Express, to name just a few.  For HR/Talent/Learning organizations looking to grow through acquisition, think about how long the products that the company is selling will last, i.e., Will they require updating? Are the company’s product lines growing?
  • Finally, understand … please, please, please understand that  whatever you want to improve in the acquisition target, such as revenues, will take twice as long and twice as much investment as you initially thought. If you aren’t comfortable with that timing and investment, think again before acting.

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