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Research has identified attributes that appear to be associated consistently with successful acquisitions.

 

Figure: Attributes of Successful Acquisitions

 

Successful acquisitions generally are characterized by:

• target and acquirer having complimentary assets and/or resources which results in a high probability of achieving synergy and gaining competitive advantage
• making friendly acquisitions to facilitate integration speed and effectiveness and reducing any acquisition premium
• when targets were selected and “groomed” by establishing a working relationship prior to acquisition (e.g., through strategic alliances)
• target selection and negotiation processes which result in the selection of targets having resources and assets that are complimentary to the acquiring company's core business, thus avoiding overpayment
• maintaining financial slack to make acquisition financing less costly and easier to obtain
• maintaining  a low to moderate debt position which lowers costs and avoids the trade-offs of high debt and lowers the risk of failure
• possessing flexibility and skills to adapt to change to facilitate integration speed and achievement of synergy
• continuing to invest in R&D and emphasizing innovation to maintain competitive advantage

 

For example let us take the case of Cisco Systems. Cisco provides the hardware and software that are behind start-of-the-art Internet networks, generating over $12 billion in annual sales.  Contributing significantly to Cisco's strategic competitiveness and its ability to consistently earn above-average returns is its successful acquisition strategy because advancing technology precludes Cisco from doing everything itself.  Therefore, corporate growth is achieved by buying products and technologies the company cannot (or does not want to) develop internally. Cisco is very active with its acquisition strategy, acquiring 51 companies during the six and one-half year period ending in March 2000 (with 21of those completed in the last 12 months of that period).  By mid-year 2000 figures, the company was on pace to complete at least 25 acquisitions for the year. 

 

Of all its acquisitions, Cisco's CEO John Chambers says that only two or three have failed to meet his expectations.  Cisco uses its acquisitions to reshape the company and to fill gaps in its product line, but the key to the success of its merger and acquisition strategy rests on its strict adherence to five guidelines.

Shared vision -- the acquiring company and the target company must be in agreement regarding where the industry is going and the role each party is to play in the industry's anticipated future.

Creating short-term wins -- employees see a culture that is attractive to them, identifying an opportunity to really do with Cisco what they were doing before, or even more.

The target's strategy can blend with Cisco's -- that is, when integrated with Cisco's operations, the acquired company will create value.

Cultural similarity and compatibility -- Chambers and his colleagues are skeptical of acquisitions that hope to integrate cultures that differ dramatically from one another.

Geographic proximity -- the target company must be close to the parts of Cisco's current operations with which it would be the most closely associated, preventing operational inefficiencies due to distance.

 

Cisco's integration team facilitates compliance with the five guidelines by helping "newcomers" fit into the Cisco family.  Because of the pre-acquisition work of this group, negotiations between Cisco and target companies tend to be very brief.

 

A clear differentiation between the three term's mergers, acquisitions and takeovers, would be in order here. A merger is a transaction where two companies agree to integrate their operations on a relatively co-equal basis because they have resources a3nd capabilities that together may create a stronger competitive advantage. An acquisition is a transaction where a company buys a controlling or 100% interest in another company with the intent of using a core competence by making the acquired company a subsidiary business within its portfolio. While most mergers represent friendly agreements between the two companies, acquisitions sometimes can be classified as unfriendly takeovers.  A takeover is an acquisition--and normally not a merger--where the target company did not solicit the bid of the acquiring company and often resists the acquisition.