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Now, this is a critically important idea in business strategy.
We need to consider whether any strategy we're pursuing
is the best use of our time and resources and energy and money.
Or is there some other strategy that we would be better off pursuing instead?
So yes, it's important to realistically understand the strategic
benefit of the potential acquisition.
And yes, it's critically important to understand
do we have the right purchase price and does that take into account all of
the costs that we think we might need to incur to make this acquisition a success?
And of course,
we would never go forward if the benefit didn't outweigh those costs.
So of course, that first part of the equation,
the benefit minus the cost, needs to be a positive.
But that's not enough.
We need to also understand if that net benefit,
whatever it is, does that outweigh any other potential
net benefit of an alternative strategy we might pursue instead?
So, for instance, we might think about that a little more narrowly.
We might think about it as, let's say our immediate goal is to diversify, and
we're thinking about making a potential acquisition to diversify in a certain way.
What we want to really carefully think about, is there another way to achieve
that diversification, perhaps through growing organically or
building the capability internally versus acquiring it?
And if that potential route to achieving that diversification goal is better,
represents a better cost benefit than going through this potential acquisition,
maybe it's less risky, then perhaps we ought to think about perusing that path
instead of this path of the potential acquisition we're considering.
We also might think about this more broadly.
We might think about it in terms of is there a different strategic objective
that might be even better for us to pursue than, say, diversification?
Maybe there's something else we want to do instead, and
that would represent a potentially more valuable strategic choice
than going through this particular acquisition.
So this idea of thinking carefully about opportunity cost
is a critically important idea in business strategy.
And it should govern not just the way you think about potential acquisitions,
but really any strategic choice your make.
You should really ask yourself, is my time and energy and money better spent
on a different initiative, on a different potential strategy,
on a different way of achieving the objectives we want to achieve?
So as we think about all of these elements of an acquisition analysis,
we've now talked about all of them, we've talked about the strategic benefit, and
how that's composed of both the independent valuation of that target,
as well as what value we think it might add
to integrate that target into our current business operations.
That's the strategic benefit.
We've talked about the purchase price and how that needs to take into account
what are all of the costs that we're gonna incur to make this acquisition a success?
And can we incur all those costs, as well as pay this potential purchase price, and
will that still net out to be positive?
And then finally, we need to make sure that that net positive,
whatever it works out to be, is still a more valuable thing to us
than the net positive of some other potential strategic action.
In other words, is the opportunity cost something we ought to think about here,
and would that push us in a different direction, or
would that push us in favor of going with this potential acquisition?
So that is the acquisition analysis.
Now, as you go forward, I think there's some potential things for you to consider.
First of all,
we know that we ought to assume that there's a high probability of failure.
We know that most acquisitions fail, and so
we have to really be aware of the pitfalls.
We have to really carefully evaluate those targets inside and
out, not only to understand their independent value, but
understand how putting them together with us will create some synergy,
some integrative value that's greater than the sum of the parts, right?
It's always beneficial to be friendly and not hostile.
There's lots of ways that target firms can resist a takeover, and
you don't really want to have that problem.
I think it's much more useful as part of a holistic negotiation
where there's mutual benefit.
It might be useful to think about dating before you marry.
In other words, think about the use of strategic alliances.
That's sometimes a less costly and less risky way to sort of test
the waters on a potential acquisition, by working together a little bit first and
seeing if there's some mutual benefit there and if you work well together.
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It's important to focus on what we're good at,
what our competencies and capabilities are, what our knowledge is, and
how will acquisition increase the value of our competitive position.
Does it make sense to acquire this particular target, and is it obvious
how we might be able to create more value together than we did separately?
And finally, it's important to work hard on the integration.
It's important not to underestimate the difficulty
of integrating the two companies, the two businesses.
It's a very difficult part of a merger or an acquisition, and
it's one of the primary reasons that acquisitions often fail,
is that the integration proves to be more difficult than anticipated.
So there's some tips for
thinking about how you might increase the potential success of an acquisition once
you've analyzed it using the acquisition analysis.
Michael LenoxSenior Associate Dean and Chief Strategy Officer
Jared HarrisSamuel L. Slover Research Chair in Business Administration
