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Can R&R Ice Cream succeed in Australia?

The proposed acquisition by Yorkshire’s R&R of an Australian ice cream business raises questions about the logic for such M&A deals. Traditionally M&A is driven by synergies that come from integrating businesses in some way, think Pfizer and AstraZeneca. But, with R&R’s proposed deal, integration benefits seem unlikely. So how do companies justify deals where there are no integration benefits?

The answer normally comes from superior management insights. The acquiring company knows something about how to run the acquired business better than the existing management team. The knowledge may be about operations, products or markets. For example, in operations the acquiring company may have developed a different approach to sourcing or a superior production technology or better systems. In the product area, the acquiring company may have better formulations or new product ideas. In the market area, the acquiring company may have developed a different segmentation, or it may have discovered a new market segment that could be exploited by the target. In other words, as my new book points out there are lots of ways in which the acquiring company can add value to the target company without integration (“Strategy for the Corporate Level” by Andrew Campbell and co-authors, Jossey Bass, 2014).

Sometimes the insights are about people. The acquiring company may be better at evaluating managers in the target or more objective about their skills. Changing a few managers at the top of a company can often make a big difference. Sometimes the insights are about performance metrics. The acquiring company knows what level of performance is possible and is able to push the acquired managers to achieve it.

So why do M&A deals often go wrong, leaving the acquiring company worse off? First, acquirers often pay too much giving away all their added value to the sellers, think of HP with Autonomy. Second, the new ideas that the acquirer brings often turn out not to be so valuable in the local context, think of Tesco in the US. Third, the management habits and rules of thumb of the acquirer turn out to have a toxic effect on the target company, causing it to perform less well, think of the oil companies when they acquired minerals businesses.

R&R’s managers have proved that they know how to add value and avoid subtracted value in previous acquisitions. But, will their formula work as well in Australia?

By Andrew Campbell, Ashridge Business School author of ’Strategy for the Corporate Level’, Jossey Bass, 2014.

This was posted in Bdaily's Members' News section by Andrew Campbell .