Decentralization is key for a Programmatic Serial Acquisition Strategy
Flush with investor dollars and beeming with leadership hubris— Inexperienced capital allocators may be tempted to take a shared services approach.
If serial acquirers are a vehicle for growth and value creation, decentralization is the engine that propels the vehicle. Decentralization serves dual purposes in an acquisition model.
Firstly, there are direct operational improvements that come from subscribing to a decentralized model. Spreading decision-making responsibilities across the chain of command allows organizational agility; operators that are more involved in the specific contexts and problems of their business units have increased power to make decisions, improve products or services, and deliver on customer satisfaction1.
Autonomy and control at the business unit level is vital to an acquirer as it scales. The capacity of centralized management teams to make micro-decisions across a growing number of business units is quickly exceeded2. It is much more efficient to disperse these operational responsibilities further down the chain of command and across the organization. Efficient, and also more effective; power is given to managers that are in the best position to produce the best results at individual subsidiaries.
Decentralized operations also benefit from enabling a wider pool of talent, particularly lower down the chain of command. Lower-level employees are empowered to put ideas forward, contribute to solving micro-scale issues that are outside the purview of upper-level management, and work towards improving the business through innovation3.
William Weldon, CEO of Johnson & Johnson, commented on the benefits of decentralization for innovation, saying, “decentralization helps in innovation [in] that it allows different people with different skills, different thoughts, to bring together different products and technologies to satisfy the unmet needs of patients or customers”4.
Concurrently, business operators are given decision-making responsibility and accountability that drive more efficient, outcome-focused processes. These businesses tend to display greater entrepreneurship, independence, and improved business results through increased flexibility and control at the business unit level56. While such a model can run into issues due to the demand for a larger number of strong leaders, the net benefits are substantial when implemented successfully7.
Operational performance and efficiency are determining factors in an acquirer’s success. These factors drive organic growth rates, which in turn attract investor attention8 and increase free cash flows, both of which can provide the dry powder to make further acquisitions, return capital to shareholders, pay down debt or alternatively and if justified, invest in specific growth initiatives9. The second part of the dual purpose engine of decentralization, however, is arguably more important; it is the foundation on which an acquirer’s macro-level success is decided.
The second key purpose is that decentralization enables an acquirer to scale, which is the key driver of perpetual value creation in an acquisition-based business model.
How it enables scale takes shape in several ways. Firstly, decentralization disperses acquisition responsibility to subsidiaries as well. They are given the M&A playbook of the umbrella organization, which has already honed its own acquisition process, and then given the freedom to begin acquiring for themselves. Effectively, this process expands the acquirer’s wider M&A capacity and future acquisition potential with each business it purchases, establishing a repeatable process for scaling and creating value10.
Decentralization also allows an acquirer to scale by reducing the need for lengthy integration processes with acquired businesses. Going through the process of creating new chains of command, business-specific processes and organizational restructures to integrate new businesses can be inefficient, costly, and time-consuming11. The decentralized acquirer can avoid this altogether, instead providing centralized strategic guidance, resources, and capital investment to drive organic growth while decentralizing operations to avoid significant efforts towards integration.
Finally, scale is driven by the acquirer’s reputation. Reputation is not a factor that shows up on a balance sheet, but is nonetheless vital to a serial acquirer’s success. Without it, acquisition opportunities are limited mostly to distressed assets that fail to drive accretive value for an acquirer12.
Building a good reputation means ensuring employees are taken care of, legacies are maintained, and that business can continue as normal post-acquisition, all of which are primary concerns for business owners in the selling process13. A decentralized model naturally lends itself to these features: upper-level management and its role in guiding the business stays relatively stable, employee roles are maintained, and the legacy remains intact by not having the appearance of getting wrapped up in a conglomerate.
Final Thoughts
Decentralization is paramount to a serial acquirer’s success. A decentralized organizational structure provides agility, efficiency, and employee empowerment that improves individual business units and contributes directly to an acquirer’s future growth.
It’s this future growth that serves as the primary impetus for a decentralized model and makes it so paramount to an acquirer’s success. Decentralization is the key that unlocks scale for acquirers by allowing the M&A flywheel to take full effect, with each acquisition providing the capacity for future acquisitions and dispersing organizational exceptionalism across a wider corporate structure.
These factors, more than any micro-scale improvement, are the reasons that decentralized acquirers have outperforming growth potential. Constellation Software, TFI International, and WSP Global are all serial acquirers that have demonstrated the effectiveness of the positive feedback cycle and outsized performance that decentralization can create14.
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