Acquisition opportunities, like breakthrough product ideas, can capture one’s imagination and start a stampede. Occasionally, the stampede is appropriate. More often, it is not. So when does an acquisition make sense?

The purpose of an acquisition is to gain access to business advantages important to your strategy*. Examples include:

• Ready access to markets via brand, shelf-space, relationships, sales methods, etc.
• A new product line that complements, protects, expands, or replaces existing products
• Intellectual property and licensing rights 
• Production capabilities
• Expertise and talent
• Facilities and equipment

Strategic Acquisitions
While an acquisition can provide these benefits and more, it also comes with many costs, the purchase price often being the smallest portion. The real costs may skyrocket due to:

• Unexpected delays, whether during the acquisition process or in realizing expected gains
• Poor due diligence leading to financial, legal or strategic barriers
• Significant distractions from other or more important initiatives
• Culture clashes that damage productivity and jeopardize profitable execution
• Damage to morale caused by lay-offs of redundant functions
• System and process incompatibilities that require unanticipated parallel and duplicate functions or unanticipated investments
• Unexpected loss of critical acquired personnel
• Inadequate knowledge of the new business

The list goes on. Thus, an acquisition should not be taken lightly, nor should it be pursued at all unless of strategic importance. To that end, there are three main scenarios for sensible strategic acquisitions.

1. Facilitate Implementation
With a strategy established, an acquisition can be one alternative for implementing that strategy. While every acquisition has its costs and risks, it may be a faster and/or less risky to acquire necessary capabilities and access than to build them internally.

2. Critical Component
No strategy makes sense if you can’t figure out how to gain access to critical customers, obtain the rights to essential technology, or profitably deliver the value for which customers are willing to pay. In some cases, a particular acquisition or type of acquisition becomes an essential component of your preferred strategy. If the acquisition is not possible, you will actually go back to the drawing board and reconsider your strategy.

3. Raison d’être
Occasionally, an acquisition opportunity is so powerful that it is worth dropping almost everything, shifting directions significantly, and building your future around the acquisition. This is a rare occurrence. The strategy does not come first; the possibility of the acquisition drives the strategy.

If you are considering an acquisition within one of these three scenarios and agreeing on a clear strategy before chasing an acquisition, you are likely making a sound strategic choice.

Tail Wagging the Dog
Unfortunately, many acquisitions occur outside these three scenarios and are not strategic acquisitions at all but examples of the tail wagging the dog. If they are successful, luck deserves the credit. Most are not. At best, they provide minor or delayed benefits. At worst, as mentioned above, they create culture clashes, suck up money, and distract your organization from strategic priorities. The three most common scenarios leading to tail-wagging-the-dog acquisitions are:

1. Idea Meets Strategic Vacuum
In some cases, an acquisition opportunity pops up like any random idea and is pursued without much strategic evaluation. It looks like a good idea, there is money available, so why not? Don’t do it. Eliminate the strategic vacuum first. And be sure the acquisition opportunity is only one of many inputs to that process.

2. The Fishing Expedition
Some companies seek acquisition targets in the hopes of finding a future for the business. Like any fishing expedition, you may catch a record-book specimen, but you are more likely to haul in a boat load of small fry. If you find that rare specimen and take time to reconsider the direction of your business, it could be a great strategic acquisition, your raison d’être. But if you pursue one or more small fry because you can’t think of anything else to do, you are trusting to luck as in Idea Meets Strategic Vacuum and inviting all the trouble described above.

3. Who’s the Target Here?
Watch out when the acquisition target finds you and begs to be acquired. Flattering? Yes. Smart? Again, it depends on strategic fit. If they are exactly what you need, why weren’t you looking for them? Do they facilitate implementation of your current strategy with benefits outweighing risks? Do they provide critical access or block a competitor? If questions such as these are true, it still begs the question: “Why weren’t you looking for them?” Don’t be the target, or should I say, the victim!

Of course, this could be a once in a lifetime opportunity – your raison d’être or an unbelievable strategic component. It happens, though not often.  So back to the strategic drawing board you go!

Strategic Fit First
Make any acquisition an intentional component of your strategy only after careful strategic consideration and due diligence. For anything that just pops up, whether an acquisition opportunity or a cool product idea, ask two questions:

• Does this fit our current strategy?
• Is it so good we should reconsider our current strategy?

If these don’t garner resounding yeses, resist the urge and get back to work.

* The only exception is acquisition as an investment, in which case growth and profitability are the only concerns. Strategic and operational fit are quite irrelevant. This is not a typical business strategy.