Acquisition: The Concept of Business Synergy

There are two predominant ways that a company can grow: organic growth and acquisition (or merger). Organic growth is defined as either taking the products or services that you currently make and sell more, or developing new products or services. Acquisition growth is defined as buying companies and consolidating them into your own.

Acquisition growth can be very risky, but the rewards can be large. Companies like General Electric and Procter & Gamble have executed this strategy for years. Yet, in a young industry like the fitness industry, acquisition can be confusing. What determines a good acquisition from a poor acquisition? Do you buy another club, or just start one? Should you buy just for the sake of growth, or is there a specific strategy to employ?

These questions lie at the very foundation of every company’s decision on how to grow in a way that creates value. Yet, even in other mature industries, like banking or automotive, it is still more of an art than a science. When you bring two companies together, the result has got to be greater than the sum of the parts, or it just does not make sense to pursue.

The Harvard Business Review (HBR) did an analysis, a long time ago, on mergers and acquisitions after the LBO (leveraged buy out) craze of the 80s. After an analysis of good acquisitions versus poor acquisitions, HBR concluded that good acquisitions exhibited parts of, or all of, two major contributing factors.

The first factor was categorized as “shared resources.” What this typically means, but not always, is job layoffs. Two companies are combined and they don’t need as many people doing the same jobs. They do not need as many retail store locations, so they shut some down. This normally is a result of an industry becoming very competitive and therefore, the acquisition facilitates consolidation.

The second factor was entitled “transfer of skills.” Some companies have a skill advantage over other businesses in their industry. One company may purchase effectively, while another has excellent customer service. The transfer of these skills, although an arduous process, can be a major factor in making an acquisition successful.

Both of these factors are referred to by mergers and acquisitions professionals as “synergies.” Yet, the biggest mistake made in many projects is an underestimate of how long it will take to reap the benefits of these “synergies.”

The largest source of delay in the process is cultural differences between organizations. The stronger a company’s culture, the harder it is to assimilate to a new one. A business professor once said, “When culture meets strategy, culture always wins.”

So, in short, when deciding on how to grow your company, be cautious in how you choose. Acquisition of another company can be a very successful venture when done well and with proper thought. However, without a prudent process in place, it can be disastrous.

Bob Palka is the owner of Jacobs Ladder, LLC, the creator of the Jacobs Ladder and Stairway climbers. For more information, email bpalka@jacobsladderexercise.com or visit jacobsladderexercise.com.