A couple of thoughts from my pile of tearouts during my just completed China trip. First:
I am considered to be an avowed enemy of acquisitions, and I can understand why. I do indeed decry the typical "Fat 'n Ugly + Fat 'n Ugly = Quick and slick" "logic" behind giant get-togethers of mediocrities for defensive purposes in industries in distress.
On the other hand, there is an acquisition type I applaud, and the Wall Street Journal recently (0703) featured just such a pairing. GE plans to take on Pratt & Whitney in the turboprop market. To spearhead the effort, GE has just completed the purchase of Walter Engines, an 85-year old firm from the Czech Republic—Walter, the WSJ reports, "earned a reputation ... for building rugged propeller engines used heavily in Eastern Europe and niche markets such as agriculture and cargo planes."
Bingo! Fill a need-hole by paying top dollar for a superb, well-regarded firm of modest size that complements your main business. Of course, achieving the desired result is not easy, as the melding of the desirable practices of a non-bureaucratic, independent, and proud firm into a Big Dog's corporate culture is very hard and delicate work—the failure rate is high. Still, the practice makes sense if you are willing to work patiently with such acquired companies.