Company Acquisition Strategy: Mergers and Acquisitions Guide

Introduction to the Acquisition Context

I-Look Company is a major business based in Columbus, Ohio, that specializes in the sale of all types of eyewear — including spectacles for the visually impaired and sunglasses of all designs. The company has been in operation since 1998 and seeks to expand into the African market by acquiring Yengo Enterprises, which operates in major East African cities: Nairobi, Kampala, and Kinshasa. As CEO of I-Look, several critical issues must be considered before proceeding with this acquisition.

There are many reasons why business owners decide to sell. These include a lack of capital to reinvest in the company, retirement plans, partnership disagreements, a desire to reduce liability risks, poor health or death of the owner, and inadequate management skills (Sherman, 2010). On the other hand, a company may have several strategic reasons to acquire another firm. The primary motivation is often a projected increase in cash flows, with the expectation that the combined business will add measurable financial and market value (Miller, 2011).

Before proceeding with any acquisition, it is essential for the buyer to analyze the expected return on investment. The acquisition will be shaped by several constraints: the availability of funds, the availability of the opportunity, and the anticipated return. The buyer must compare investment options carefully and weigh potential risks by evaluating probable positive and negative outcomes. While investors should be loss-averse to guard against significant losses, they must also recognize that some degree of risk is inherent in all transactions and should not be a deterrent (Miller, 2011).

The Buyer and Seller Acquisition Process

To fully implement an acquisition, the buyer must first assemble a team of both internal and external advisors. This team may include accountants, lawyers, bankers, insurers, and valuation experts. Their primary objectives are to focus on the fundamentals of the acquisition — such as market expansion, product mix, integration concerns, and distribution channels. The team also serves as a strategic think-tank, and it is the CEO's responsibility to assign specific roles, designate a spokesperson, and ensure coordinated action (Sherman, 2010).

Once a well-coordinated team is in place, the next step is planning the acquisition. This plan identifies specific objectives, analyzes potential targets, and outlines the value-addition and cost-saving advantages expected from the transaction. Acquisitions are generally triggered by factors such as market growth, access to new markets or products, access to talented personnel, improved reputation, reduced operating costs, new distribution channels, new technologies, fewer competitors, and the development of new brands (Sherman, 2010).

From the seller's perspective, the process requires equal preparation. The seller must anticipate the sale and ensure the buyer pays a fair price aligned with the company's true value. To achieve this, the seller should form a team that understands the seller's motivations, goals, and objectives. This team should be familiar with changing industry trends, have access to a wide range of potential buyers, possess experience in acquisitions and financial matters, and be well-informed on taxation issues. The team should therefore consist of financial advisors, accountants, and legal counsel who will collectively evaluate and manage the selling process (Sherman, 2010).

The seller must also prepare an action plan that outlines the time required and the key milestones of the deal. Acquisition transactions can typically take between 60 and 90 days, though they often extend considerably longer. A well-structured action plan ensures the process runs efficiently and on schedule. It is equally important for the seller to evaluate market trends and carry out a realistic business valuation, providing insight into how marketable the business is and informing the asking price. An understanding of industry structure, growth dynamics, and macroeconomic factors gives the seller greater leverage at the negotiating table (Sherman, 2010).

Sellers are also prone to a number of common mistakes. Being either indecisive or impatient can be costly: if a seller appears too anxious, buyers may exploit this to push for a lower price, while excessive delay can cause the opportunity to pass entirely. Timing is therefore critical. Additionally, the seller must carefully manage when details of the sale are disclosed publicly. Informing employees too early may prompt senior management to leave out of uncertainty, while creditors and suppliers may become wary, accelerating pressure on outstanding debts or reducing willingness to continue supplying the business (Sherman, 2010).

Why Mergers and Acquisitions Fail

It has been widely reported that approximately 70% of mergers and acquisitions fail. There are several reasons for this. In most cases, the acquirer's failure to thoroughly analyze the commercial, financial, or strategic implications is a primary cause of collapse. It is important for the acquirer to determine whether the target company's management is running the business effectively before adding new responsibilities. If management is already struggling before the acquisition, the combined entity is unlikely to perform well. A notable example is Compaq's acquisition of Digital, which was already facing serious competitive pressure in its core markets — a situation that ultimately contributed to Compaq's own downfall (Pearson Education, 2012).

Furthermore, the acquiring enterprise must have a clear strategy to ensure the acquisition genuinely adds value. A cautionary example is IT&T's early 1990s acquisition of NCR in an attempt to enter the IT sector. The acquisition resulted in losses of millions of dollars because IT&T failed to verify that the deal would add value to its core operations. Other factors contributing to M&A failure include neglecting available alternatives, insufficient understanding of the new business, misjudgment of the market, overestimation of projected synergies, and inadequate analysis of foreseeable problems (Pearson Education, 2012). Keeping these pitfalls in mind is essential to creating a successful combined business venture.

According to Peng, Wang, and Jiang (2008), institutions can be classified into two categories: formal and informal. Institutions affect societies politically, legally, and culturally, and in doing so, they influence the stability of markets. Bodies such as NGOs and government institutions shape firm performance and strategy through legislation and policy requirements that must be complied with. Institutions also complement resource-based and transaction-cost dimensions of business strategy (Peng et al., 2008).