Strategic Acquisitions

8. Takeover Traps

If an acquisition is going to fail, it is usually because there was inadequate investigation beforehand, or no clear, agreed plan for what should happen afterwards.

Failure can be extremely expensive. Consider the possible pitfalls before making any move.

8.1 Your own business may suffer.

• Your management may be tied up with the acquisition and overlook problems closer to home.
• You may well find you have increased your exposure to risk (for example, if you have borrowed heavily to fund the acquisition).
• You may have acquired assets you can neither use nor sell.

8.2 The acquired business may underperform.

• Your management skills may not be transferable to the acquired business.
• Key employees might leave. Try to 'lock them in' with a contract using bonuses linked to agreed profit or contribution targets.
• Hidden problems may emerge after the acquisition. For example, suppliers may raise their prices or the market might turn against the business.

8.3 You may run into difficulties in achieving your expected economies of scale.

• Key staff may be unwilling to relocate.
• Sacking employees may be expensive, and will unsettle people you want to keep.
• Trying to merge two cultures can be a long-drawn-out, disruptive business.

8.4 Some acquisitions backfire spectacularly.

• Beware that buying out your competitors may not be as ideal as it seems. Ensure the sale and purchase agreement includes terms and conditions preventing the former business owners from setting up a similar venture again. It is important to rule out a similar new business in close proximity to the one you take over. Otherwise you risk them winning back former employees and customers and regaining their market share.