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July 30, 2013

M&A is often characterized by incomplete if not irrational thinking

The Globe and Mail featured an article on mergers and acquisitions with Canadian companies and a professor from Wilfred Laurier. It is worth a read:
There are many reasons for companies to acquire another business and merge it with their own. One reason that companies needing the new, new thing is to use acquisitions as a substitute for their own R&D.For example, Vancouver-based Flickr, a company offering a photo-sharing application, was acquired by Yahoo Inc. for the reported sum of $35 million. Although Yahoo has in-house R&D, they recognized that by acquiring unique technologies of startups similar to Flickr, it can build market share quickly.The objective for the acquisition of smaller companies set by Yahoo in the Flickr case, or by other larger firms such as Google or Blackberry, has been carefully defined. John Banks teaches MBA students about M&A at Waterloo, Ont.’s Wilfrid Laurier University, and he reinforces the importance of identifying the purpose of buying a business.“Regardless of how attractive the deal price or fortuitous the opportunity, it is essential that the impact the acquisition is intended to have on the firm’s strategic direction be both understood and realistic for the transaction to be truly successful,” explains John Banks.Companies that use the M&A process to supplement their R&D must have access to rigorous corporate finance skills in order to be true to their mandate.  The assessment needs to be especially meticulous since research shows that this particular aspect of M&A is often characterized by incomplete if not irrational thinking,” says Banks.A smaller firm is often attractive as an acquisition target because it can have the flexibility of a speed boat that manoeuvers rapidly around larger ships. Amar Varma, founder of Xtreme Labs – which provides mobile experiences to firms – and who mentored Rypple and its acquisition by Salesforce, says, “There is the ability for a small company to be nimble and to not be hampered by bureaucracy. They can do R&D at a quicker pace and without legacy products.”
Jacoline Loewen is a director at Crosbiewhich focuses on succession advice for family businesses and closely held small to medium-sized enterprises. Crosbie develops customized strategies, particularly in relation to M&A, financing and corporate strategy matters. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business. You can follow her on Twitter@jacolineloewen.
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