Datalink's M&A: Growth by design

Careful bid pricing, good integration strategy, and a vigilant CFO help it avoid the pitfalls that plague so many other acquirers.

By Karen M. Kroll, CFOworld |  Data Center, Datalink

Moreover, the acquisitions effectively move the cost of acquiring new customers off the income statement. "We're using our balance sheet to grow," Barnum says. Rather than boost sales expenses, Datalink --- a public company since 1999 -- can use its cash to make an acquisitions. Even after its recent deals, as of Sept. 30 it had more than $30 million in cash and equivalents available.

Datalink's formula seems to have worked. "There's evidence that it drives future earnings," Martinuzzi says. For instance, after Datalink's acquisition of Incentra, many clients were retained and spending a greater portion of their IT budgets with Datalink.

Keys to Success

While acquisitions offer one way that companies can grow, numerous studies have established that the strategy often fails to succeed in creating value succeed. For one, KPMG's 2008 study, "All to Play For," found that over the preceding decade the percentage of deals actually enhancing value never topped 34%.

Of course, as with any average, the variances can be significant. "Some companies do M&A very well; they understand the important pieces that need to be executed," says George Geis, adjunct professor at UCLA's Anderson School of Management.

And when companies like Datalink succeed with their dealmaking, it can be traced to the way they avoid certain typical pitfalls.

One obvious one is setting too high a price for the target. "If you overpay," Geis notes, "you get the winner's curse" -- winding up with the target, but with little chance of recouping a too-high purchase price.

Datalink believes it does a good job of setting competitive, but not lavish, acquisition offers.

Another cause of value destruction can be poor integration, which can lead to personnel disruptions. And here, Datalink seems to do very well.

Because most of Datalink's acquisitions are a means of gaining clients, it's critical that they retain the sales engineers that attracted the customers in the first place.

"The integration doesn't have room for error," Barnum says. To make it work, Datalink integrates the acquired employees immediately when the deal is signed, he explains.

The 'Earnout' Tyranny

In addition, Datalink avoids earnouts -- those contracts, written into the acquisition agreement, that allow the sellers to gain additional compensation in the future, as long as the business meets certain financial goals. Earnouts could limit Datalink's ability to make changes to the business -- they're "a recipe for disaster," Barnum says -- as the seller might balk, saying the change will hamper his or her ability to meet the goal.


Originally published on CFOworld |  Click here to read the original story.
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