Be Prudent When Purchasing

Published 6 years ago

There is something at play that many company leaders just can’t get right – acquiring other companies. Many assumingly lucrative companies were acquired and then failed.

Either there was a lack of full disclosure before the transaction, or the new owners were over confident in their ability to create astronomical profits from those companies.

A mantra I fully subscribe to is, great companies are bought, not sold.

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When a company approaches you to sell their business, you must ask why they are selling. Could it be that the ship is about to sink, are they relocating, retiring, bored by their industry or do they foresee calamity.

Back in 2012 Tiger Brands acquired 63% of Dangote Flour Mills, therefore controlling the company; changed the name to Tiger Branded Consumer Goods Plc. However, the company performed poorly.

Three years later, Dangote Industries had to buy it back for a nominal $1 and took over their debts. Tiger Brands had to write off R700 million ($53 million) in loans that it granted the operation.

Timing Is Everything

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On the same note, in January 2005, Bebo, a social networking website, was launched. It became one of the most visited sites, with millions of active users. In 2008, AOL came along, excited about the prospects of expanding it. They purchased it for $850 million – making the founders, Michael and Xochi Birch, $595 million richer as they owned 70% of the company.

In May 2013, the company voluntarily filed for Chapter 11 bankruptcy protection. On July 1, 2013, the Birches paid $1 million to get the social network back. Consider the profit they made after receiving $595 million for the company five years before.

In both stories, the former owners bought the companies back for a price drastically less than they sold them for.

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There were many examples of this type of disaster during the dot-com bubble around the turn of the new millennium. A promising company, owned by Mark Cuban and partners, was on the rise. Back then, Broadcast.com was breaking ground with online live streaming.

Yahoo! got excited about the new concept and jumped into a hole thinking it was a springboard. In 1999, they purchased Broadcast.com for $5.7 billion in Yahoo! stock. Cuban became a billionaire and quickly diversified his newly-found pot of gold into other asset classes.

Broadcast.com soon went bust, becoming one of the spectacular failures of the last two decades.

It wasn’t the most notorious failure though. The worst of all time is AOL again. They acquired Time Warner for $160 billion to create the world’s largest media company. Within 18 months, the company reported a $99 billion loss and the combined value of the company had dwindled from $226 billion to $20 billion. Unthinkable!

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With most failed acquisitions, what is often evident is that the entrepreneurial drive is misplaced. The original vision is lost as the company is absorbed into a big corporation that does not share the same founding values and company culture.

To become a gigantic multinational, acquisitions are quicker than organic growth. We cannot avoid acquisitions as a growth mechanism. So, how do entrepreneurs, looking to make an acquisition, institutionalize the vision, drive and company culture that will exist beyond the founder?

Due diligence needs to be done, and the top talent at those companies need to be retained, particularly at an executive level. It is common for major companies to acquire just 80% of another company, leaving 20% for the management and founder. This keeps them motivated and encourages them to stay and help the company to continue to grow. – Written by Paul Mashegoane

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