Buying a good business

 

Every leader wants to own good businesses ones in high growth profitable industries that have a competitive advantage. But what do you do if you want to buy a good business but you are not experienced at managing it or the price is high? This is one of the challenges we address in a new book “Strategy for the Corporate Level“ Jossey Bass May 2014.

Added on 04 May 2014 by Andrew Campbell

Every leader wants to own good businesses ones in high growth profitable industries that have a competitive advantage. But what do you do if you want to buy a good business but you are not experienced at managing it or the price is high? This is one of the challenges we address in a new book “Strategy for the Corporate Level“ Jossey Bass May 2014. The simple answer is that you need to learn how to add value to an already good business and to do so quickly. If you can add value to it you can justify paying a premium for it. If you can add a lot of value you are unlikely to be outbid by others. Of course it is easier to learn to add value if you already own the business. When Rolls-Royce acquired the marine business of Vickers it acquired a number of different businesses one of which was the Ulstein offshore ship business. This small Norwegian busi­ness made components and systems for vessels used to supply oil rigs – a technically demanding environment in which ships in the middle of very heavy seas have to remain within a few meters of the rig. Rolls-Royce could see that this was a good business. The value of such a vessel to an oil company is very high and there were few competitors able to design and build them. Unfortunately Rolls-Royce had little experience in this industry and Ulstein needed help. Ulstein needed to broaden its products add niche technology capabilities and build a capability to sell globally. While Rolls-Royce had some relevant skills such as global sales they were not skills appropriate to this industry. To address the management gap Rolls-Royce hired a new head for its marine businesses who put together a team of managers to lead this effort. He drew from Ulstein Rolls-Royce and outside. He built a team that could add value to Ulstein and other businesses in the marine division. For example the managers from Rolls-Royce in his team understood the value of selling systems (such as complete drive systems including electronic controls) rather than components (such as diesel engines). They also understood the value of offering long-term service support. They had learned this from their experience in civil aerospace and defense. With these skills Rolls-Royce was able to add value to its marine businesses. The division has grown from about £750 million revenues in 2000 the year after the acquisition to over £2500 million in 2010. Today Rolls-Royce is a leading competitor in this segment. It is also easier to add value if you enter the new business at the same time as others are learning how to add value: at the growth stage of the industry. E.ON the European power and gas company entered the renewables business by invest­ing in a number of wind farms through both greenfield sites and small acquisitions. Wind farms were attractive busi­nesses operating with secure revenues under government subsidy schemes. At the outset E.ON was not able to add signifi­cant value to these businesses but had a plan for doing so in the future. E.ON planned to build a large portfolio of wind farms and extract economies of scale. Purchasing scale could be used to lower costs (as the purchase of equipment is the major element of total cost) and the process of bidding designing building and operating could be standardized to lower costs and improve performance. Some value could also be generated by providing a strong balance sheet and by moving managers across Europe. While E.ON had a vision of how it could add value to the renewables business it had to create the capabilities required as few of these were available in house. It hired a new CEO Frank Mastieux from outside who built up a team capable of adding value to the wind farm businesses. Some of the team came from existing E.ON businesses some from outside and some from the various acquisitions. Today the renewables busi­ness is one of the areas where E.ON is focusing new investment. There are fewer examples of successful large acquisitions into new areas or of acquisitions of good established businesses. This is not surprising. Developing new skills at the corporate level is not easy. It often requires significant changes in people and a willingness to let go of past habits and processes. It is easy to presume that a company will be able to learn to add value especially when the business is attractive. Normally the acquiring company believes that its standard corporate processes will be good for the new acquisition and fails to make the tough people decisions needed to develop new skills. Also the premium that is paid for a large acquisition is often bigger than the opportunity to add value. The one exception is when good businesses are maturing. These businesses often have more costs than they now need. Private equity companies and other corporate raiders with skills at cost reduction and rationalisation have done well buying good but mature businesses and squeezing costs. This blog is draw from Chapter 6 and was composed by Andrew Campbell and Jo Whitehead. See the table of contents as www.corporatelevelstrategy.info