Gretchen Morgenstern in The New York Times wrote about how, “Blockbuster deals like Bayer’s $56 billion takeover of agribusiness giant Monsanto seldom live up to their hype.” Her article was based on research of 9,000 major acquisitions, which showed an investment in the Russell 3000 stock index would have increased by 200% from 2001-2016, while an investment in firms making major acquisitions would have increased only 67%. (Disclaimer: I’m a supporter of the strategy to grow by acquisition for small and mid-sized companies and have a book coming out next year on this subject.)
It’s always different when you’re playing with OPM, other people’s money, as the executives doing this mega-deals are doing. Small business owners, using their own money or a personally guaranteed loan, are going to be a lot smarter about the company they buy, what they pay, and how they integrate the target company. In other words, as I like to say, in my market (versus the private equity and above markets) there are two sanity checks. One is the bank and the other is the buyer (it’s their money and guarantee).
In my upcoming book I cover 19 reasons to buy another company. I’m realistic to know all 19 will never fit a particular situation, but if there are a couple solid reasons it can make sense (to grow by acquisition). And the size of the acquiring firm shouldn’t be a factor. I’ve had clients with as little as $2-3 million in sale buy other companies.
It’s like any other business or personal decision, if it makes sense then do it. But don’t do it just for bragging rights, as it seems large-firm executives do.
“You can accomplish anything in life, provided that you do not mind who gets the credit.” Harry Truman