Growing by Acquisition

It's often a successful strategy, but beware of the possible pitfalls

Buying out a competitor or a compatible business is a successful strategy for many fast-growing companies. One-third of the CEOs on PricewaterhouseCoopers' list of 425 fastest-growing businesses has made that choice, according to the company's latest survey. A large majority, 82%, rate the purchase as successful. On average, acquisitions made over the last three years contributed more than one-quarter of this group's corporate revenue.

Their reasons for buying? No. 1 is to gain complementary products or services. A close second is to get new markets or distribution channels. Other incentives are economies of scale, acquiring new technology or management talent, and diversifying as a hedge against volatile markets.

When acquisitions are a disappointment, the main reason is incompatible top management, the CEOs reported. Other mistakes are not doing enough homework before making the purchase and misreading the target company's strengths and weaknesses. These are "painful lessons learned," says G. Steve Hamm, managing partner for PWC's middle-market advisory services. "All three were mentioned by at least 83% of those involved with an unsuccessful recent acquisition."

If they're smart, next time they'll heed the first commandment of shopping for an acquisition: Buyer beware -- of egos.

By Theresa Forsman in New York