Last year, business spent a staggering $5.9 trillion dollars worldwide on mergers and acquisitions (M&A) according to Statista – well up from the $3.3 trillion annual average for the previous decade – and yet, as Harvard Business Review has found, 70%, or more, of these fail to achieve the results expected.
The primary reasons for looking at a merger or acquisition are, of course, to preserve your market position by combining forces, in some way, with another company that addresses that market, or to reduce overall costs by improving economies of scale. Another reason, albeit less frequent than the first two, is to enter a new market or market segment – whether geographic or product-related.
These seem fairly straightforward, so what happens to cause what seems to be a massive waste of shareholder capital, and how can you beat the odds?
Valuation Issues / Over-paying
Probably the biggest reason for announced M&A deals to be cancelled is that of valuation – a good recent example being Elon’s Musk’s proposed acquisition of Twitter which had gone through months of post-announcement dispute over the value initially agreed.
But, of course, value is frequently destroyed after the merger / acquisition has taken place, resulting in substantial write downs for the company.
We saw this with AOL Time Warner – the $182 billion (in stock and debt) acquisition of Time Warner by AOL at the height of the Internet bubble. Although the companies envisaged a massive business combining some of the leading classic media brands of the time (Time magazine, CNN, Warner Bros) with the new-technology savvy and distribution abilities of AOL (an Internet superstar in the late 90s and turn of the century), the Internet valuations bubble burst in early 2001, and a year later, the merged company had to declare a $99 billion loss, leading to the departure of the top team and eventual breakup of the severely weakened company.
The primary issue here is hubris – the teams leading the M&A not taking a sober and realistic look at valuations and risks on both sides, but rather being buoyed by what they see as the upside of the deal. It’s essential that both sides take a hard look at the various scenarios (including possible stock-market corrections) that could occur in the period following the deal, properly understand where value will be added by doing the deal and price accordingly.
It might mean a smaller initial “pay day” for the stakeholders of the acquiree, but they won’t then face clawback action and destruction of value of their stake in the new business, which will also have a far better value growth due to lower debt taken on.
So often, what makes an acquisition target attractive is its dynamism – especially in the case of long-established companies acquiring smaller, more nimble ones to boost market share. And the converse applies, too, where a company decides to go after a long-established (generally larger) competitor that has a lower valuation due to having become relatively slow-moving, convinced they can “fix it.”
Typically, these fail: when the smaller, nimbler company team runs into the bureaucracy of the larger one, and decides it cannot operate in that environment. In the second case, the inertia of the larger company negatively affects the teams from the more successful one and often results in lower productivity throughout.
The 2001 $25 billion acquisition by HP of Compaq was a classic example of this cultural mismatch. HP announced the deal, saying that it recognised how the “entrepreneurial spirit” at Compaq had allowed it to become the world’s largest PC brand – an area where HP had struggled for quite some time – and looked to the deal enabling the spread of this spirit throughout the long-established, much larger HP.
In the event, what happened, from various reports, was that the very bureaucratic culture of HP overwhelmed the nimbler one of Compaq and pretty well all the top executives and teams left within some eighteen months. Although HP did end up having the largest share of the PC market, the costs and upheaval resulted in a $2 billion loss for the combined company’s first quarter and many billions of goodwill written down over subsequent periods, not to mention the restructuring charges associated with some 26 000 jobs.
Of course, culture mismatches can occur in many ways – the interaction between leadership and others in a business, the approach to customers, geographic and language differences, and so on, as many failed acquisitions and mergers show.
While acquisitions involving companies with differing cultures can work, they have to be very carefully planned, with a clear vision of what the resulting entity will look like, culturally, at all levels, and how it will be achieved – training, integration exercises, and so on. This vision then needs to be very clearly communicated throughout the two businesses and the leadership teams have to actively work to ensure the integration plans are carried out successfully, with OKR frameworks adjusted to reflect this.
Without the close, active, and ongoing commitment and work by the leadership teams to ensuring the success of the integration, the merger / acquisition will not be successful.
When embarking on a merger or acquisition, the reasons for doing so, the expected result, shape and culture of the new business and the path to achieving this have to be absolutely clear in the minds of all involved in the deal.
For example, if you see an opportunity to incorporate an under-performing competitor in your business to gain economies of scale and greater market share, ask yourself if anyone on the leadership team of the target business is someone you want to retain. After all, the business is under-performing (which makes it an attractive acquisition target, at least financially), so would that not point to serious shortcomings with that team?
Too often in these deals, there is an attempt to merge the two leadership teams, rather than being clear headed about which of the two (or more) potential leaders for each role is the better for the new business. The result of poorly merged teams is low morale, lost sales and a loss of the better staff, who are generally the first to leave because they can most easily find new roles – a significant loss of value, in other words.
The $36 billion Daimler Chrysler “merger” (so it was styled, although it was in fact an acquisition) of 1998 was an example of leadership issues leading to failure, although there was also a severe culture clash. Essentially, the US-based team was left in place but now subjected to a very different, autocratic top-down culture from Germany – a complete contrast to the US relatively laid-back and flat structure culture.
No attempts were made to bring the cultures together and integrate them – as evidenced by the ease with which Daimler could sell the unit as a whole within a decade for just $7 billion – a massive write down.
Too often, companies appoint teams of M&A advisors (generally at high cost) when contemplating any reasonably sizeable deal. And then, the leadership of the company/ies step back and let these advisors get on with it, until the deal is done and the leadership now has to take over.
This simply cannot work. As is clear from the preceding points, the active and ongoing deep involvement of leadership is essential if the contemplated deal is to be successful. The more distant they are, the more likely failure will result.
Leadership needs to take the lead on such deals and use the M&A advisors in just that role – an advisory one. This way they can be sure that the issues surrounding value, culture and future leadership, among others, are properly understood, discussed and planned for.
Of course, there are other reasons for failure, too, but almost all are as a result of one of these top 4 reasons.
There’s little doubt that the sharp increase in M&A activity last year is partly driven by companies looking to reduce risk by bolstering their business volumes, especially useful in times of higher inflation, and the drop in stock market valuations can mean some great buys are available.
By ensuring the committed involvement of the leadership teams to these points, you will significantly enhance the probability of success – for not all are a failure as exemplified by the $57 billion acquisition of Gillette by Proctor & Gamble in 2005.
Are you considering this a strategy for the year ahead, too?
I work with successful owner-led businesses to enhance their growth, profitability, cash flow and business value.
If you’d like to have a conversation about your business, strategy, culture, your board, or any business challenges or concerns, book a free 30-minute call with me here. I’d be delighted to talk with you.
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