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Tuesday, 27 March 2012

Small Acquisition Issues

Conversations with colleagues last week have me thinking about the issues managers in large firms face acquiring a small firm. The size of acquisitions received a lot of attention by managers and academics in the 1980’s and 1990’s with a view that the power imbalance between large companies acquiring smaller companies led to failure.

However, in recent times, the acquisition of smaller firms has become increasing popular. Professional services and technology companies have been highly successful in acquiring small innovative firms to access specific technical knowledge or capabilities, while large mining companies have acquired smaller firms possessing an outstanding resource to take it to development.

It’s interesting to consider some of the issues that acquiring firm managers face acquiring a smaller firm, these include:

 • Underestimating the complexity – Managers involved in implementing an acquisition often assume that small size means a simple acquisition. However, small acquisitions require the same core work to be undertaken (e.g. finance, information technology, human resources, etc) as a large acquisition. 

 • Underestimating the risk – A small acquisition might appear quite simple, but with potential risks to the acquiring firm out of all proportion to its size. What are the downside risks?

 • Higher priority activities - Functional managers may neglect a small acquisition, focussing their attention on higher priority activities with greater organisational impact, or greater impact on how their individual or team performance is assessed.

 • Overloading acquired managers – A lack of coordination by functional managers (e.g. information technology marketing, finance, human resources) in the acquiring firm during integration often means that when they do focus attention on integrating the acquired firm activities and data requests are received simultaneously by a small number of core managers or staff in the acquired firm, overloading them.

 • Specific capability – In acquisitions focussed on knowledge or capabilities, rather than a physical resource, the specific knowledge or capability (the reason why the firm was acquired) will be embedded in a small number of key staff. How will the acquirer retain these people and the capability they possess?

 • Cultural issues – People choose to work for a small firm for a wide range of reasons, innovation, lack of hierarchy or silos, etc. Acquisition by a larger firm brings a range of cultural changes as large firm policies, reporting requirements, the need to consult other managers regarding decisions, drop in relative standing, different technology, etc that “weren’t needed last week and aren’t very useful” are imposed. The start of culture clash?

What else have you seen that acquirers of a smaller firm should consider?


Alex Cochran said...

Assimilating innovation within the cultural framework of the acquiring entity is incredibly difficult unless senior management clearly set parameters within the organization as to why the acquired entity is superior and it is made clear that this is a key plank of the acquisition strategy. This message then needs to be relayed clearly throughout the various management and operational levels of the acquirer for the innovation to be maintained.

Anonymous said...

My experience in having worked for smaller companies taken over by larger ones is that the acquirer encountered difficulties in all the areas mentioned, especially underestimating the complexity. There was a lack of understanding of markets addressed by the smaller company.

John W. Howard, Ph.D. said...

As some of our client professional firms have acquired other (usually smaller) firms, they have found the Job Fit assessments we provide invaluable in assessing where and how severe cultural mismatch and new managerial relations problems may lie. The same assessments have allowed them to anticipate and mitigate Job Fit mismatch as acquired professionals are assuming new and changed roles. In M&A activities you can't avoid these bumps altogether, but forewarned and forearmed are always better than surprised.

Tony Williams said...

I think it is important that the acquiring company understand its own actual culture and how it is likely to interface/interact with the acquired company personnel and systems. Specific to acquiring small firms, I would add that often they do not have the business expertise to hold their own in the deal structuring and negotiation process, or the leadership needed to manage the post-integration change/transition within their own organization. These are generalizations, but I think it happens more often than not.

Dr. Chris Eckert said...

Thanks all for the comments, interesting.