When big companies acquire small ones

by Myrna R. Co

(first published in the Philippine Daily Inquirer Business Friday, April 29, 2016)

We have seen the trend in recent years – big companies acquiring smaller ones that are very promising or are already established in the market.

We have observed, with mixed feelings, Jolibee Food Corporation’s takeover of well-loved Mang Inasal, Greenwich, Red Ribbon and Chowking — formerly independent brands all.

Retail giants SM and Puregold have been been on a buying spree of independent supermarkets and supermarket chains.  Among  SM’s latest acquisitions are Cherry Foodarama and Waltermart; while those of Puregold are Parco and Eunilane supermarkets.

Earlier, in the 1970s, the Gokongwei group brought a flour mill and three sugar mills and refineries to form URC Sugar in the 1980s.

selecta

Selecta was originally a pre-war small business owned by the Arce family.  From the late 1940s, it had been doing well in its small niche in the ice cream and fresh milk market until it was acquired by RFM Corporation in 1990.  Selecta is now the brand to beat in ice cream.

In 1976, SM acquired a small bank, Banco de Oro, and parlayed it into what is today the biggest bank in the country in terms of assets.

The benefits to the smaller entrepreneur are obvious.  Selling out means instant fortune — millions the entrepreneur can spend in launching a new start-up, if he chooses to.  This is the case of Mang Inasal founder Edgar Sia who has recently embarked in the business of building community malls in the Visayas and Mindanao.

Moreover, depending on the deal, the start-up may still retain a part of the ownership and thus a continuing share of the profit, as in the case, again, of Mang Inasal and, at first, of  Greenwich.

The question that is more often asked is:  Why do big companies buy promising start-ups when they have the resources to put up competitive versions of such firms?

Serenidad F.  Lavador, Small Enterprises Research and Development Foundation (SERDEF) trustee and technical adviser, thinks such a deal makes perfect sense on the part of the big company.

“When developing a new business, product or service, big companies are bogged down with cumbersome policies, procedures, and protocols.  The multi-layers of a corporate organizational hierarchy typically slow down decision making. It takes massive amounts of time, money, and manpower to build a new brand from the ground up.

“On the other hand, small companies, especially today’s young and technology-oriented start-ups, are much more agile.  They can decide on the spot, cut corners, get out of the box or even throw out the box during  an innovation run.”

Sam Hogg, a venture entrepreneur and columnist of Entrepreneur magazine, says big companies have a lot to lose if a new venture fails.  The risk is not only financial but also in terms of hurting the corporate image the company has worked so hard to build.  On the other hand, the only risk in buying a small established firm is the danger of overpaying for what it acquires.

Because of the expected financial windfall in selling out, more small enterprises may be looking to be the next Greenwich or Mang Inasal.

How can a small company position itself to catch the eye of a big, acquiring firm and at the same time ensure it wouldn’t be selling itself cheap?

The Mang Inasal acquisition story has been studied by experts and scholars.

Marketing guru Josiah Go pinpoints the company’s agility and flexibility – made possible by its small, non-hierarchical structure —  in setting up branch stores in strategic places in the country.  Armando Bartolome of the Association of Filipino Franchisers. Inc. cites Mang Inasal’s store positioning as its strongest suit.

Before the takeover, Mang Inasal was a fast-growing young company.  It was on  its way to being a force to reckon with in the fast food industry, having established more than 300 stores nationwide and earning an estimated 2.6 billion pesos annually.  The acquisition move enabled the giant food chain to overcome the competition and at the same time take over its market share.

Lavador analyzes Greenwich’s attractions:  “It has already established a following when acquired.  It was geared to the Filipino taste and the average Pinoy’s wallet.  Greenwich was associated with pizza experience comparable with that of American franchises, but at cheaper cost.”  She adds Greenwich kept innovating not only on pizza flavors but also on pizza side dishes.

Of Selecta, Lavador recalls the original product of the Arces as “aspirational” – ice cream that isn’t always accessible but usually hankered for.  “It had a “wow” factor, being associated with limited runs rather than with mass production.”  Looking back, she surmises it could have pioneered locally in what is now known as artisanal ice cream.

Mike Michalowicz, who has himself sold two companies he built, picks up tips from his own experience:

  • Build a consistent record of making profits.
  • Know what acquiring companies are looking for. Figure out if the buyers want to diversify, leverage technology, cut costs by consolidating, dominate the marketplace, or simply generate more revenue.
  • Build a solid market niche.  You won’t be swallowed cheap if you’re thriving in your niche.
  • Provide a unique product or service.
  • Make yourself dispensable. Your business should be able to run without you.

“These are all things you should be doing anyway, things that make your company more efficient and profitable whether you plan to sell it or not,” Michalowicz concludes.  The goal in prepping for the sale of the company should be to whip it into the best shape possible in order to boost its value

 

(For more stories on entrepreneurship and small business management, visit the SERDEF website at www.serdef.org.)

 

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