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Nested Acquisitions 

 December 9, 2019

By  Steve Nunn

A Nested Acquisition is when a company acquires a business which has just acquired another. Instead of the usual “Parent-Child” relationship of an acquisition, they end up with a “Grandparent-Parent-Child” three-tiered relationship.

Nested Acquisitions are fraught with dangers. It will be extremely difficult for the “Parent” and “Child” companies to continue to do business-as-usual, because the “Grandparent-Parent” integration will likely take priority. The following “normal” fears associated with being acquired will now be exacerbated:

  • Staff uncertainty about current jobs or future careers
  • Companies’ possible loss of identity
  • Integration priorities will shift between “Grandparent” and the “Parent” company

With small and mid-size acquisitions, the biggest asset of the business is usually the expertise and knowledge of the people in the business. The period after a nested acquisition has the potential to be extremely disruptive, risking the departure of key staff and jeopardizing the success of the integration’s progress.

Zorn, Sexton, et al1 discuss nested acquisitions in the Journal of Management. To reduce, or avoid, problems with nested acquisitions, they recommend focusing upon retaining and supporting the management team. Let’s look at an example of how successful this can be:

Dubin Clark of Boston takes a long-term view of the businesses they acquire, focusing upon niche small businesses that are about to embark upon a major, tricky change, such as an owner’s retirement, or the need to replace a manufacturing facility.  Their integration strategy is to support the acquired management team and provide financial backing to get them through the impending transformation.

In July 2019, Dubin Clark acquired Astar, a home heating and air conditioning business in central New York state. Only three months later they acquired Auchinachie, a fourth-generation family business about 100 miles away with expertise in home plumbing, heating and air conditioning. It is unlikely that the integration of Astar was complete before the Auchinachie acquisition and integration took place.

The integration strategy of Dubin Clark is perfect for minimizing, if not avoiding, the complexity of a nested acquisition. They focus upon maintaining one of the greatest assets of any small business: the people.

Looking ahead, there could be more acquisitions by Astar, as the announcement describes this as their first acquisition.

1 Zorn, Michelle L., et al. “Unfinished Business: Nested Acquisitions, Managerial Capacity, and Firm Performance.” Journal of Management, vol. 45, no. 4, Apr. 2019, pp. 1488–1516, doi:10.1177/0149206317708855.

Photo by Blake Weyland

Comments

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