The Good, The Bad and The Tragic: Stories of Acquisition for Growth

Alan Hall wrote earlier this week about the four guiding principles of successful acquisitions in An Acquisition Destroyed My Business. Why?

In that spirit, here are the inside stories from founders about recent acquisitions that were highly successful, and even more importantly, the details of their acquisitions that failed. Yes, I was able to find at least a few brave souls who were willing to talk about their failures as well. May we learn from their wisdom.

Carl Shepherd, Founder, HomeAway

First up is the Co-Founder of HomeAway, Carl Shepherd, who’s spearheaded 18 global acquisitions in the past eight years--an average of more than two acquisitions per year. Prior to joining HomeAway he was COO of Hoover's Online and also oversaw multiple acquisitions there as well.

In summary, Shepherd advises entrepreneurs to be clear and strategic about the type of company they’re seeking. He notes that HomeAway sought the market leaders in each country within a very tight range of business models to select the 18 acquisitions (so far) they’ve pursued. Here are his basic rules:

1. Court them. Become their friend to learn what's important to them (e.g., the company's legacy, their desire for their teams to live on, or just money) and gauge how willing they are to sell. This is especially important when acquiring small businesses.

2. Don’t rely on traditional valuations. Small businesses are immune to valuation discussions based on discounted cash flows or public multiples. Instead, they often have a number in mind and your task will be easier if you figure out if you can pay what they want instead of immediately resorting to charm and negotiating skills. Their reality is what they want to see in their checking account when the transaction closes.

3. Use the best advisors you can get. Having the best lawyers, accountants and auditors will make the process go much more smoothly.

4. Advise the seller to get the best advisors they can get, too. It’s far easier to work with an experienced M&A attorney than the seller’s brother-in-law who is a public defender, but wants to help.

5. Focus on integration from day one. Clearly define how you’ll integrate the business into your existing company, and do not underestimate the need for a cultural fit. Combining companies with different business models or whose workers have substantially different values might make integration and operations too complex.

6. Have a plan. Determine if you will retain the talent or the technology well in advance, and make sure the target understands the plan so they can help you identify weaknesses.

Shepherd was also willing to share the details of an acquisition that failed: “When I was COO of Hoover’s Online, we identified a target that had created a veritable traffic magnet, but they had not developed the advertising organization to profit from it. We focused too much on that inventory, banking on the fact that we had a cracker-jack ad sales team and were perpetually sold out at Hoovers.com. Just as we closed, the bottom dropped out of the ad sales market, cost per thousand impressions plunged (CPMs), and we had not created plans for developing other revenue streams fast enough.”

“The acquisition failed, not because we didn’t know what we were buying, and not because we were unsuccessful in integrating the culture (they were smart, great people), but because we had not laid out a longer term strategy for diversifying their revenue stream that we could tap into stemming from a macroeconomic challenge.”

Using this article synthesize in your own words the top 3-5 Success factors in a merger/acquisition. What about this article surprised you?