Our research into corporate growth (see, for example, "Toward a New Theory of Growth" in Issue 2, or "10X Value: The Engine Powering Long-Term Shareholder Returns" in ssue 8) shows that the fastest growing companies look at mergers and acquisitions as part of an overall strategy to roll out their expertise. Many of these fastest growing companies are able to produce strategic or product/process innovations internally and then use acquisitions as a way to roll out that innovation across new markets or geographies. An example of this is Newell Rubbermaid, which has used acquisitions to spread its management philosophy and manufacturing, distribution and sales expertise across a wide variety of product categories. Newell Rubbermaid manufactures and markets high-volume consumer products, including housewares, home furnishings, office products, and hardware and tools.
Checking the Completeness of the Vision
Companies rarely go into an acquisition thinking that they do not have a vision. Here is how to tell if it is real:
- Does it include a plan for disrupting the market or changing the rules of the game in the industry?
- Does it consider the competitive environment at all?
- Does it include a series of steps to get from here to there, one of which happens to be a merger or acquisition?
- Does the merger or acquisition target understand and agree with the overall combined company vision and its role in achieving it?
- Are there leaders in place who believe in the vision and are ready to help carry it out?
The vision should be a robust view of the future state of a given industry or set of industries. It should be based on the dynamic changes in the key forces of a given industry and not be merely an extension of given business plans, adjusted for inflation. A view of the future environment will help companies evaluate existing capabilities and provide an understanding of where a potential merger could serve to meet the strategy. In many instances, significant mergers have a fundamental, industry-altering impact on a company and its key competitors.
Acquisitions and alliances are two alternatives to building the capabilities needed for companies to drive toward a vision. If an acquisition is called for, it is critical that this original vision be kept in the forefront while companies plan and execute the merger. It should drive the strategic intent of the merger and the priorities of the integration process.
Finally, the merger will work best if both companies agree on the vision for the overall company going forward and where the acquisition fits into that vision. Most of the top-performing companies with which we spoke cited agreement on vision as a critical factor in the success of the deal and the ultimate strategy.
Again, look at Tyco's purchase of Kendall. Tyco's overall corporate vision was to dominate the four businesses in which it was engaged. It held a small position in the disposable medical products business and needed to dramatically build its capabilities if it ever hoped to dominate the business. The Kendall deal was the first of four acquisitions in this market that eventually gave Tyco what it needed to succeed. Tyco management knew where Kendall fit and was able to convince Kendall management of the same.
Unfortunately, for many companies, the vision and true strategy work is begun after the acquisition. Too often the transaction focuses on the numbers without regard to the hard work of creating market-disrupting strategies. The result is an underperforming merger.
Once the vision is set and an acquisition is determined to be a potential path, companies must begin the evaluation process. Successful companies have a good understanding of what they are seeking. Because the whole transaction path started at the point of fulfilling the company's vision by buying capabilities, the company knows what capabilities it needs and understands the long-run value of having these capabilities in hand. From that list of capabilities they are able to methodically screen and evaluate potential targets. Evaluating strategic, financial and capability measures, they are able to select a potential candidate. Further, they need to structure the appropriate deal, come to a "good" price and create the optimal alliance.