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A recent Forbes article that I wrote, “Retail Strategy And Learning How To ‘Think Big,” provided an overview of techniques that I use to help executives better understand strategy and gain a level of comfort in making big decisions.
A topic covered in the article is the importance of mergers and acquisitions and knowing when to make an acquisition.
I received a significant number of inquiries from individuals who read the article. However, several readers were disappointed that I didn’t discuss the following: What should a company do if they made an acquisition, but within several years the acquisition isn’t working as planned, or changes within their industry have reduced the value of the acquisition?
It’s a great question. It’s also a very timely question due to the disruption in the economy by Covid-19 and changing consumer behavior. Nearly every industry is undergoing some form of disruption. The retail industry is facing severe challenges.
Let’s answer the question by using Amazon as a hypothetical example.
Amazon’s Acquisition Of Whole Foods
I worked for Amazon from 2015 to 2017 as the worldwide expansion leader for AmazonFresh and Amazon Pantry. I wrote strategy documents known as “Six Pagers” in which I outlined arguments for Amazon to build their own stores, acquire Whole Foods, and make additional acquisitions. I left Amazon to open my own consulting practice; Kroger was my first client.
Amazon acquired Whole Foods in June 2017.
I’ve complimented Amazon for making the acquisition, but some say that Whole Foods has been “left behind.”
In my opinion, an argument can be made that several factors have changed the value of Whole Foods to Amazon. For example, Amazon is opening their own supermarkets that will sell organics and other products found in traditional grocery stores. Sales at its physical stores, like Whole Foods, reportedly dropped in Q2 of 2020.
I also think it’s possible that Amazon will sell more groceries in its own branded stores than Whole Foods will sell in its stores. Why does a company like Amazon need a company like Whole Foods? In my opinion, the answer is that they don’t. In this position, a company might consider divesting its acquisition to another retailer for which it is more strategic. That retailer could then open Whole Foods markets inside its stores.
Did Amazon make a mistake in acquiring Whole Foods? I don’t think so. However, when change happens in an industry like grocery or within a company, an acquisition’s value can be minimized. The bottom line is this: Sometimes companies can generate more value by divesting an acquisition and pursuing other options.
When To Divest A Company
Corporations typically acquire more companies than they divest. This can result in corporations making mistakes that cost shareholders money while doing little to improve the fortunes of the corporation when they do divest. It doesn’t have to be that way.
In my experience, divesting a company requires the same level of analysis and planning as making an acquisition. In fact, I believe divesting a company can be one of the most important decisions a corporation can make. This requires assigning a team of skilled individuals to thoroughly assess their company’s portfolio for divestiture candidates and identify how to maximize the value of the divestiture.
The biggest challenge when divesting is often convincing executives to sell. Senior executives often believe that the only time to sell a business is if it’s failing. That’s false. The business may simply have better strategic options it can pursue.
I’ve been involved in consulting projects whereby corporations held on to an underperforming business because they were convinced that installing a new leader would turn the business around. It didn’t work. In one case, when the corporation did divest the business, it had lost the majority of its value.
Wall Street and business analysts may reward companies when they make a decision to sell or buy a business when it can generate the most value, and both are likely to receive exceptionally favorable press: the former owner for selling an asset at peak value and the new owner for acquiring a business that will generate increased revenue and strengthen their ability to compete.
To assist executives in determining what business to sell, they can ask what are known as fit and value questions. Consulting firms and financial institutions use the technique to narrow down choices.
They can determine fit by asking, “Is keeping the business essential to positioning the company for long-term growth and profitability?”
They can determine value by evaluating if a business will be worth more if it’s held in a company’s portfolio or owned by another company. If a company divests its asset, can they sell it for more than they paid? If a business is more valuable elsewhere and it isn’t a fit, it should be sold.
Acquiring a company requires extensive planning. So too does divesting a company. Both should be treated with the same rigorous planning and analysis.
Conclusion
Regardless of the size of a corporation, executives can learn lessons from watching what Amazon, Walmart, Microsoft, Tesla and other companies do as it relates to their mergers and acquisitions (M&A) strategy. In my opinion, these corporations have mastered the art of M&A.
Retailers should especially follow what Amazon is doing closely due to Amazon’s continued growth in e-commerce, groceries and other categories.
Knowledge is power.
