At the same time, the nature of the market itself has changed dramatically, with engagements increasingly executed through managed services providers and vendor management systems. More and more firms are finding their go-to-market strategies need to change, and many have come to a fork in the road: Do they continue to grow at market rates, do they sell, or do they acquire for scale in an industry where scale actually matters?
Acquisitions: A Daunting but Worthwhile Growth Strategy
Many companies decide acquisition is simply too hard, but the rewards can be well worth it if you are willing to take the journey — and apply these principles:
- Have an acquisition strategy. That way, you will know what types of companies are a great fit to fold into your organization.
- The closure rate for acquisition is roughly 10 percent, in my experience. This means companies pursuing acquisitions must develop a robust target list. Identify 10 or more companies that fit your profile, either through your own research or by working with advisory firms.
- Relentlessly pursue your strategy and your targets, because mergers and acquisitions are so downright difficult.
- Stick to a disciplined process, either internally developed or enabled by external partners, to ensure your efforts remain on track and produce results.
Once you have the right process in place — identifying targets, screening those targets, valuing and developing a deal structure, performing due diligence, and closing and integrating — you can determine what to look for in an acquisition.
First and foremost, you will likely hear that “culture trumps strategy every day.” Truer words were never spoken. If the cultural fit of a target company is poor, the combined company will never become greater than the sum of the parts.
Once you have determined the target is a great fit, it is critical to ask yourself questions regarding the more technical aspects of the business:
- Does the target organization have great clients and client relationships, complementary geographies or offerings, or adjacent capabilities (e.g., recruitment process outsourcing or global delivery) that add value to your company’s operations?
- Does the company command a premium, or is it distressed?
- Does the company have any hidden skeletons that would put your business at risk?
- Is it a well-known entity with a positive image in the market?
- Will this company help to enhance your company’s future goals?
- Finally, do you have an approach to closing and integrating this new and exciting part of your company to drive the positive synergies you have built into your business case?
If the answer to these questions is “yes,” then you are a great candidate for growth through acquisition.
Does It Actually Work?
The next question people typically ask themselves is, “This sounds great — but does this process actually work?”
The answer is a resounding, ”Yes.”
For example, take the staffing firm Digital Intelligence Systems (DISYS), a recent client of mine at Wolf Den Associates. DISYS has employed an aggressive acquisition strategy to achieve strong and sustained business growth.
DISYS decided several years ago to build a robust acquisition roll-up platform with a goal of being a top-10 provider of IT staffing services. The company developed tools and process and hired executives with expertise in acquisition. As a result, DISYS has successfully executed three deals in just a little more than two years.
The first deal was a tuck-in to prove and improve DISYS’s process. The next two were substantial — Xtreme Consulting Group and Princeton Information — adding more than 40 complementary flagship clients to DISYS’s portfolio while extending the company’s reach in New York and the Pacific Northwest and building out its capabilities in the high tech and financial services industries. These latter two acquisitions were fully integrated in less than 60 days, and DISYS has already realized substantial top- and bottom-line benefits.
I am convinced that mergers and acquisitions really can unlock hidden value if you are disciplined and seek out great targets that can deliver on a holistic strategy for growth. Sometimes, one plus one really does equal three!
Dr. James J. (JJ) Foster is vice president of Wolf Den Associates and a fellow with DISYS Expert Network.