Why Acquisitions Fail - the five main factors
Survey after survey has proclaimed that most acquisitions fail. Denzil Rankine’s Executive Briefing on Why Acquisitions Fail (FT Prentice Hall) examines why. There are five key factors, which we will examine below:
- Flawed business logic
- Flawed understanding of the new business
- Flawed deal management
- Flawed integration management
- Flawed corporate development
Flawed business logic
Acquisition is a high-risk strategy. It is not a universal, simple growth formula, or a quick fix. Since acquisition also boosts egos, the essential questions can often go unanswered.
Some companies should not be acquiring at all. A company with difficulties of its own is unlikely to be helped by acquisition. Both Compaq and Digital faced intensifying competition in their core markets. However, after merging, the combined business struggled to integrate and its performance was unexciting.
An acquirer needs a strategy that adds value. If it is driving down a blind alley, acquisition simply accelerates the pace. For instance, AT&T acquired into the IT market looking for the benefits of convergence – it shoe-horned NCR into its strategy, but the fit was poor and it lost billions of dolllars.
Opportunism can also lead to disappointment or disaster. ITT created a broad group with interests from hotels to pumps, but it did not create value – the unwieldy group lacked acquisition rationale and management failed to exploit the group’s assets.
There are alternatives to acquisition. Dyson has taken a third of the vacuum cleaner market, but only after Hoover declined to licence the technology. Toyota entered the luxury car market successfully through Lexus (contrast this with Ford, who struggled after paying a premium for Jaguar).
Flawed understanding of the new business
Acquisition is complex; there are no easy solutions. Acquirers must invest the necessary time and money to ensure that the chosen target will generate the desired returns.
An acquirer must look beyond the numbers and understand the target company’s market and what is driving it. Dot.com investors got this seriously wrong. Working out why the business is really for sale helps too – the seller may have seen a problem looming in the market.
The acquirer must understand why the target business makes money – BA focuses on service, Easyjet on price – by taking the time to understand how the target operates. The acquirer can then assess integration benefits.
Acquirers cannot always justify in detail the hoped-for synergies. Cost reduction synergies are typically relatively easy to quantify and deliver. Sales growth synergies are much harder to quantify and achieve; often they are illusory.
Due diligence should identify black holes. Ferranti bankrupted itself by relying on KPMG’s re-hashed audit of ISC instead of conducting commercial due diligence (CDD) and contacting a few (non-existent) customers. British & Commonwealth hit the rocks over Atlantic Computers’ leasing deals (poor legal due diligence), and Cendant’s share price collapsed after it skimped on financial due diligence.
Good CDD goes even further by analysing synergies that challenge forecasts, inputting to valuation and negotiations and perhaps most importantly by identifying key integration actions.
Flawed deal management
Russian roulette is played with one live round in six chambers. When acquiring, some companies load the chambers much more heavily by failing to manage the deal effectively – inviting a fatal result.
There is no "right" price for an acquisition; a company is worth what the buyer is prepared to pay. With the price escalating in an auction, the buyer needs a realistic valuation and a walk-away price. Experienced acquirers find that eschewed deals often come back in their current or a revised form.
Negotiations can go wrong, sometimes even before a deal is finalised. Dresdner and Deutsche Banks’ semi-public negotiations in 2000 led to no deal, as their differing agendas clashed.
When fever grips an organisation, an acquisition, however poor, becomes unstoppable. Conversely, the process can become bogged down and fail if internal procedures are inadequate, or the seller is ill-advised.
The integration plan should be prepared as a part of valuation, and to allow rapid action. But in the heat of getting the deal done, integration is often ignored. BMW acquired Rover in a hurry, and never got to grips with the business before selling it at an estimated loss of Euro 4.1bn.
Flawed integration management
The deal is done. The acquisition team is in the car park. Arriving employees are casting sideways glances and talking with hushed voices. What happens next? How will this magnificent acquisition deliver results? To succeed, the acquisition team must have planned the forthcoming days, weeks and months.
Clear, rapid and consistent communication is essential. No hype and no empty promises. Stress levels are high, messages are misinterpreted and rumours spread. Key points need to be repeated constantly.
Integration requires clear, strong leadership. The Citigroup and Corus integrations were disastrous as joint leaders tried job sharing. Clarity of leadership is required lower down too; this is not the time for patronage or too much consensus.
Change is expected and damaging uncertainty builds until it happens. Speed of action is essential, even it if risks making some mistakes.
Acquirers often under-estimate the scale of integration. Ford and BMW faced more problems than expected after acquiring Jaguar and Rover. Integration needs preparation, management and control. Sufficient financial and management resources are therefore essential. Research by AMR International shows that the ideal target is 5–10% of the acquirer’s size; minimising the problem of insufficient integration resources.
Flawed corporate development
After the first 100 days to establish control, comes the detailed and often tedious work needed to realise the benefits of the acquisition. The two businesses must be welded into one new organisation with a common direction.
A "one size fits all" or "there is no alternative" approach to acquisition can spells disaster. If the cultural differences are ignored or acquirer adopts winners syndrome, teams will not work well together and problems will follow.
Acquirers often focus so heavily on internal reorganisation that customers are ignored. Most pharmaceutical mergers in the 1990s resulted in a reduced market share for the combined businesses.
Equally, as managers go off and spend time in other, more exciting, areas someone must manage the core business. Airfix, the UK plastic kit maker, focused entirely on acquisition, allowing competitors to steal its markets and destroy the company.
Acquisitions are risky and can fail for any of the above reasons. Often, failure is due to a combination of mistakes. Success requires planning, strong management and good advice.
Putting the gloom aside for a moment, the upside of successful acquisitions can be substantial. They can make money in their own right, and they can also bring commercial or tactical advantage to the enlarged acquirer. The proof lies in the highest rated companies. A healthy balance of buying – and selling – companies, entering into joint ventures, licence or distribution agreements and organic growth lay the foundation for success for the world’s top businesses.