Does your acquisition strategy nurture growth — or stifle it?

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7 minute read 26 Apr 2018
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EY Global

Multidisciplinary professional services organization

7 minute read 26 Apr 2018

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Decentralized freedom or centralized control? One culture or many? We explore the approach of two businesses growing rapidly.

In a world of fierce competition driven by disruptive business models and rapid advances in technology, companies are increasingly looking to strategic acquisitions to enhance growth.

Half of large enterprises are planning an M&A transaction in the next year, and 40% are considering alliances, according to EY’s Capital Confidence Barometer.

Acquisitions can create efficiencies, broaden the talent pool and add successful, innovative businesses to an organization already on a rapid growth trajectory. But this type of strategy can also go very wrong if not executed properly.

Companies often make the mistake of acquiring businesses that are not the right cultural fit and attempt to micromanage them, ultimately impeding innovation and growth.

Choosing the right asset is crucial, but what the acquiring company does after the sale is typically what determines its success.

According to Brian Tayan, a researcher at the Rock Center for Corporate Governance at Stanford University, the most successful acquisitions are those in which the parent organization allows the company it’s acquiring to operate independently.

“[Companies] that make it a part of their business model to stay decentralized and allow newly acquired companies to work independently … might have inefficiencies in terms of sales, marketing, purchasing and production; they may also have redundant staff in terms of HR and IT,” says Tayan. “But the company believes it is still a net benefit to give their executives and employees the freedom to operate autonomously and without the bureaucracy that comes with large, centralized organizations.”

Tayan says a unique example of a corporation known for its extreme decentralization is the Warren Buffett-led Berkshire Hathaway, a company with more than 80 operating subsidiaries, each with complete independence and minimal oversight from headquarters.“There aren't a lot of companies with this philosophy,” says Tayan. “For Berkshire, it is part of their lifeblood.”

Growth, the right way

Lupin Limited, a global specialty and complex generic pharmaceutical company, is among the most exciting growth stories in the pharmaceutical world and has been expanding at an exponential pace, thanks to well-timed strategic acquisitions. As of August 2016 the company has more than 16,000 employees across the globe. Two recent acquisitions, GAVIS Pharmaceuticals and Novel Laboratories in the United States, purchased for US$880 million in total, are in line with the company’s overall strategy: buying companies that are a great cultural fit and bring aligned synergies in terms of technology, process, pipeline and operations.

Currently in the top ten for largest generic pharmaceuticals company by market capitalization and sales globally, Lupin primarily looks for companies that are financially sound and can operate independently. “We've made about 15 acquisitions in the last decade, and I think the best ones are the ones that we've let be,” says Nilesh Gupta, Managing Director.

In GAVIS, first and foremost, Lupin was interested in the controlled substances the company offered, says Gupta. But it was also attracted to the entrepreneurial spirit, mission and culture of the 300-person company.

Lupin, which was founded by Gupta’s father, Dr. Desh Bandhu Gupta, in 1968 with only US$250, has set a goal of generating US$5b in revenue by fiscal year 2018, and these acquisitions are helping it achieve that financial success. The company’s revenues have grown at a rate of around 20% compounded annually over the past five years, and investors have been rewarded. Earnings per share has grown at a CAGR of 26.9% for the last five years.

“We have our eyes and ears very close to the ground when we're looking for acquisitions,” Nilesh says. “You obviously look at the finance metrics as well, but I think that there's still that sniff test, there's still that gut feel and, very often, you go with the gut feel, because you know it when it feels right.”With 70% of the company’s revenue coming from outside India, it’s important for Lupin to look at regions of the world that are likely to grow over time. Nilesh, whose sister Vinita Gupta, is CEO of the company, highlights areas such as Japan (its third-largest market outside of the US) and India, Brazil and Mexico as “the right markets to be in.”

Culture is important

Regardless of the industry, having a good cultural fit is important, especially for a public-facing company with a passionate fan base, such as US-based Barstool Sports.

The New York media company, which focuses on engaging with passionate sports fans in cities such as Boston and Philadelphia (CEO Erika Nardini likens it to the early days of ESPN and Vice, both media companies known for their passionate fan bases), was acquired in January 2016 for a reported US$10m–US$15m by the Chernin Group, a media and entertainment platform company led by CEO Peter Chernin, former President and COO of News Corporation.

Nardini, who stepped in as CEO in July after having previously been Chief Marketing Officer of AOL, says she’s been impressed by how the Chernin Group, which owns stakes in various media properties, has largely left Barstool Sports alone and allowed it to keep its core company culture.“What’s really unique about the Chernin Group is they understand media and tech companies – they understand film and TV. What the Chernin Group did was create a powerful pathway toward growth, while keeping the creative and content intact and letting it find its own direction.”

An eye on management

Integrating an acquired business into the parent company should deliver synergies and drive financial growth, and part of that success is finding a company with strong management capabilities, says Nilesh.

In order for an acquired company to remain autonomous and retain the qualities that attracted it to Lupin in the first place, it’s got to be able to stand on its own, he says.

“When we acquired in Japan, there was no mass exodus of Lupin employees going in to take positions in Japan. I think whenever we acquire, we're always looking at management capabilities for their bandwidth as well,” Nilesh says.

Vinita, who joined Lupin 27 years ago with a dream to take it global, says managing an expansion over multiple geographies – especially in such a highly regulated area as pharmaceuticals – can be extremely challenging. But finding the right partnerships that will continue to drive Lupin’s entrepreneurial spirit is very much integral to the company’s growth strategy.

“Once you bring in the right people and the right companies, you've set the right strategy and mission, and you’ve ensured their objectives align with your vision, it's all execution from there on,” she says.

Summary

After an acquisition, leaders should be mindful of culture, whether or not they let an acquired company operate autonomously.

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EY Global

Multidisciplinary professional services organization