When companies acquire other companies, much attention is given to how to make the deal as successful as possible as quickly as possible (for publicly traded companies a successful deal is usually referred to “accretive” or “additive” and a not-so-successful deal is “dilutive”). Unfortunately, many acquirers make some mistakes that make getting off on the right foot very difficult. Here are five mistakes that acquirers make with respect to the customers they are bringing into their company.
- Failure to adequately understand the customers before you acquire them. In one deal that I was peripherally involved with, an apparel company acquired another without much due diligence on the customer base. One week after the deal closed the single largest customer (a large retailer) left. The acquiring company never recovered, ultimately filing for bankruptcy protection. Buyers of companies (strategic or financial) must understand the stability and value of the customer base before the deal is closed. And this does not mean making the standard calls to five customers. It means really understanding the customer base and listening to what they are saying about the way in which they interact with the company to be acquired. A scientific and validated approach to understanding the value of the customer base is critical to understanding the quality of the revenue stream to be acquired. The customer base is the most important asset in most deals and the amount of due diligence allocated to the customer base compared to historical financial statements and legal documents is embarrassing.
- Failure to make integration plans with the customers in mind. This one creates many problems. Here’s the typical example…the acquiring company decides it can eliminate the target’s account managers because “we have our own account managers and they can absorb this business.” Seems to make sense, right? What if I told you that the number one driver of loyalty to the target company was their account managers? Gee, that would’ve been nice to know before the decision to cut them all. Listening to the customers can help to make good integration decisions. If you are going to cut people or resources in the name of synergy, at least cut in areas that are not important to customers (and this means what they say is not important, not what you think is not important to them).
- Failure to communicate appropriately with customers. Customers are always the last to know. And that is probably appropriate, but recognize that they will feel this way when the time to communicate with them is appropriate. Make sure this communication is two-way communication. All too often, we think the goal is to tell the customers all we know about the deal. Filling them in on what is going on is important, but make sure to listen to them too. Err on the side of talking too little, not too much. Ask them if there are areas that the deal could be used to improve your service to and relationship with them. Find out what the deal means to them. Then you can communicate effectively based on their perspective.
- Failure to manage customer expectations. We were brought in to help a company deal with a rapidly eroding customer base well after the completion of a deal. Instead of the revenue growth the acquirer had modeled and expected, customers were leaving and revenues were declining. The acquiring company, a large, well-known company with a terrific brand in its industry, couldn’t understand what was happening. Turns out the customers expected big changes after the deal. The customers wanted big changes. The company had communicated that service and products would be much better after “we take over.” Yet from the customers’ perspectives, nothing changed! They had expected (and had been led to expect) big, positive changes. When nothing changed, they looked for alternatives.
- Failure to take advantage of opportunities. Good deals, accretive deals, get off on the right foot from the beginning. One way to ensure this happens is to look for and leverage growth opportunities immediately. If the customer due diligence is done correctly, it should also reveal opportunities for growth. It should reveal situations where customers are looking to buy more or where multi-sourcing customers are vulnerable to competitors. Attacking these opportunities as soon as the deal closes gives the acquirer the ability to jump start the first post-deal period financial results. And success begets success.
In most acquisitions, a little customer listening goes a long way. Gathered and analyzed correctly, the customer perspective can have dramatic impact on the valuation of the target company and on the effectiveness of the integration on short- and long-term profits.
