Acquisition and Divestment

When I worked in a big food and drink conglomerate I noticed that there were Acquirers and Divestors among the members of the board and senior management. I was an Acquirer, perhaps the most enthusiastic. And there weren’t many of us by the time I joined the company. There had been. The previous Chairman had bought more than a company a day, admittedly many of them small, for about five years. That’s how we came to be so big. The premise for expansion had been vertical integration. So we had flour mills to supply our bakeries and agricultural merchanting companies to buy the chaff from milling, for animal feed.

The process of acquiring had been “If they’re there, buy them” and not much other consideration. Such vertical integration might have worked at one time but Britain was coming out of that time and the consequence was that transfer pricing decided the profitability or otherwise of each trading division. The flour millers were well and truly in charge, for good reasons which I won’t go into here. They made substantial profits with relative ease, a small workforce and a gentlemanly lifestyle. The bakers made a loss, had a huge workforce and were permanently on the run. The agricultural merchants generally enjoyed the fresh air and fields.

It became obvious that a major rationalisation was necessary and a colleague of mine was set the task of doing it. He was a Yorkshire man, a flour miller and a first class cricket player. He was tough but had plenty of charisma of a particularly Yorkshire sort. I was the complete opposite. I didn’t appear tough, I came from Somerset, the West Country, and I was a tennis player. We became good friends – but only after we had retired. While I was developing Cerebos Pacific he was stripping the UK company. One day he said to me “I think you can put pictures up on the wall but I’m not so sure you can take them down”. He continued “I can take pictures down from the wall but I’m not so sure I can put them up”.  A fair assessment.

I studied the progress the two companies made. Their circumstances were quite different. Nevertheless my colleague disposed of so many companies that it broke the business. What happened?

Of course, the challenges for the two companies were quite different and I don’t imply that I could have rationalised the UK business any better than he did. However, I would say that when rationalising a business you have to be careful to avoid at least three major traps. First, the old accounts game of forgetting the contribution your weaker businesses make to your overheads. It is a trap many people fall into. Unless you can get rid of costs to the extent of that contribution you will bankrupt yourself. I don’t think that was a threat to our UK business.

Second, as you discard businesses see that you acquire some, too. A business only rationalising is quickly demoralised, overrun by accountants possibly, without much growth vision. Just as you should divest some businesses while you are acquiring so, too, you should acquire some businesses while divesting. An obviously declining business is unattractive to investors, top quality employees and the media.

Third, remember that very good profits can be had from a declining business provided you increase the technological support as much as you do for growing businesses. The tendency to stop investment because a business is declining is quite wrong. Let everyone else do that but improve your own R&D input and you will have the lowest cost production and the highest profit. Do it well enough and you will get very good offers for your business, possibly just at the time you want to sell it.

The basis for all development is how it contributes to the culture of the business.

Get that right and your business will flourish.