Grow Your Company Through Acquisition

More businesses are gobbling up other businesses than they have in years. Read these strategies from an expert on getting it right.

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In the mid-1990s, seasoned healthcare entrepreneur Greg Serrao saw an opportunity in the fragmented dental market. Group practices were becoming the norm, as more and more dentists banded together to increase profitability and share administrative costs. Yet even these small groups were not as cost-efficient as they might have been, lacking the size to invest in cutting edge administrative and business management tools.

In keeping with the trend, Serrao founded American Dental Partners, Inc., a small group of dental practices, in 1995 and used a new approach -- an affiliation model -- and he sought financing to make his vision a reality. The following year, Serrao chose a private equity partner that invested $14 million in the company and arranged $75 million in bank financing. American Dental Partners used the capital to acquire select assets from each practice in exchange for taking on all administrative and business aspects. The company went public in 1998 (Nasdaq:ADPI) and today is the dominant player in the industry, with 19 dental groups which have more than 180 dental facilities in 18 states across the U.S.

Caveat Emptor

Like many companies in fragmented, moderate growth industries, American Dental Partners chose to grow through acquisition. Today that strategy is more popular than ever, with Securities Data Corporation reporting a 14.5% increase in middle-market M&A transactions -- a total of 759 deals had been announced through the first three quarters of 2005, compared to 663 through the same period last year. Abundant credit, a stronger economy, and a more selective IPO market have all contributed to the upsurge in M&A activity. Some market sectors are so active that strategic buyers must now act quickly in order to buy the companies that are most attractive to them.

Still, haste can be dangerous. Studies quoted in Mastering the Merger: Four Critical Decisions that Make Or Break the Deal show that 60 percent to 70 percent of acquisitions fail, and that nearly 90 percent of all acquired businesses lose market share. Given the high failure rate, it may make sense to step back and evaluate an acquisition strategy carefully to make sure it fits their needs and business model.

What are the critical elements in a successful acquisition strategy?

Uunderstand the goal of your acquisition strategy.
Do you want to acquire new customers? Drive down costs? Increase the number of products you can deliver to customers? What you want out of an acquisition strategy will determine the companies you buy, the prices you are willing to pay, and the way you integrate them into your core business. If you haven't defined your goals, you can't begin to execute an effective acquisition campaign.

Never bet the company on an acquisition.
As a rule of thumb, assume that one of every three acquisitions will be a home run, one will perform adequately, and one will not work out. Make sure that you're never risking more than you can afford to lose on that unlucky acquisition.

Only buy good companies...
...especially if you don't have solid experience in turnarounds. Problem companies are almost always harder and more expensive to fix than you might anticipate.

Treat your acquisition strategy just as you'd treat any important operating strategy.
Staff it with experienced people -- including a corporate development officer -- and fund it with an adequate budget.

These are the basics of developing a good acquisition strategy. Now let's look at what can go wrong if you're not vigilant.

• Misunderstanding the customer: Will your customers really buy the products or services you assume are complementary to your own? If you misjudge their needs, you could end up with two completely un-integrated customer bases and product lines -- an expensive and unwieldy proposition.
• Overestimating cost savings: Many companies think they can squeeze significant savings out of an acquired company by moving field functions like sales, administration and service into the centralized headquarters. However, your acquired company's competitive advantage may well be a function of these field functions. Consolidate carefully in a way that provides continuity for customers.
• Underestimating customer fallout: Any time you acquire another company, you are going to lose some of the other company's customers. Don't assume that sales or revenues will be the same after your acquisition as they were before it -- at least, not in the short-term,.
• Cultural mismatch: Look at the way the acquisition target relates to its customers, suppliers and employers. Make sure that its culture is complementary to yours.

Entrepreneurs can increase their probability of success by enlisting the advice of board members, investors, and other advisors experienced in acquisition strategies. These experts can help you structure and capitalize your company properly so that it can withstand any strain from acquisitions. They can assist you in refining your strategy, identifying target companies, negotiating with management, and performing due diligence. They can help you achieve your goal of growth through acquisition while allowing your core business to continue to flourish.