Why acquisitions fail and how to get it right
Due diligence expert Denzil Rankine highlights some common mistakes and offers some great solutions
1) Flawed business logic
Acquisitions are high-risk. It’s not a universal, simple growth formula, or a quick fix. The danger is it can boost egos, leaving essential questions unanswered.
For some, it shouldn’t even be a consideration. Companies with difficulties of their own are asking for trouble. Both Compaq and Digital faced intensifying competition in their core markets and believed a merger would offer the size to fight off rivals. However, after merging, the integration became a nightmare, only creating a mish-mash of product and pricing strategies. It was a classic culture clash with Compaq’s hard-sell approach at odds with Digital’s. The resulting performance was disappointing. Many of HP’s shareholders were then reticent about the subsequent merger with Compaq as they rightly foresaw similar difficulties.
If acquiring, you need to be sure of adding value. If you’re driving down a blind alley, acquisition simply accelerates the pace. 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. Opportunism – where you buy a company you hadn’t planned or expected to on a whim – leads to disappointment or disaster. Research carried out by AMR International found that only 33% of opportunistic acquisitions met their strategic goals.
As you know, there are alternatives to acquisition, such as organic growth and joint ventures. 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 new launch Lexus; contrast that with Ford, which struggled after paying a premium for Jaguar.
2) Flawed understand of a new business
Acquisition is complex; there are no easy solutions. Acquirers must invest the necessary senior management time and finance to ensure the chosen target generates the desired returns. If your management team are flat out how on earthare you going to buy a company and integrate it? It will almost certainly cost your core business. Ask yourself, why do I want to make an acquisition and is my company sufficiently healthy to take the strain? If you’ve got the flu, you’re not going to run a marathon, are you!
An acquirer must look beyond the numbers and understand the target company’s market and what’s driving it. Is it stable and is the growth attributed to it real? Dot com investors got this seriously wrong. Do your own market research – don’t rely on analysts. Working out why the business is really for sale helps too – the seller may have seen a problem looming in the market. Unless it’s an obvious distressed sale, probe for the truth beyond the stated reason of the business no longer being ‘core’.
The acquirer must understand why the target business makes money – BA focuses on service, Ryanair on price – by taking the time to understand how the target operates. The acquirer can then assess integration benefits and typically you need to have the same focus for it to work if you plan to run it like yours, or else be clear about what type of parent you’ll be.
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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. We’ve seen companies out-perform even fanciful forecasts, but that largely occurs when the acquirer achieves operational efficiencies, not because the vendor was right.
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.
The old fashioned view of CDD was that it would offer reasons for not doing the deal. It should, however, be a value creation mechanism, which you can use for negotiating on price and challenging forecasts, and more importantly for business planning and identifying key integration actions.
3) 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, as other interested parties fall by the wayside.
Negotiations can go wrong, sometimes even before a deal is finalised. Ego is just one thing that can get in the way. British Airways part-owned low-cost airline Go and refused to sell to easyJet. Instead the company was sold to 3i, which subsequently sold it to the company known for its bright orange logo, making a fortune in the process. Dresdner and Deutsche Banks’ semi-public negotiations in 2000 led to no deal as their differing agendas clashed.
When deal fever grips an organisation, an acquisition, however poor, becomes unstoppable. Those involved lose the ability to say ‘no’ and would rather be known for their ability to clinch a deal than for pulling out. 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 …4.1bn.
4) 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 a time for patronage or too much consensus.
Change is expected and damaging uncertainty builds until it happens. Speed of action is essential, even if that risks making some mistakes.
Acquirers often underestimate the scale of integration. Ford and BMW faced more problems than expected after acquiring Jaguar and Rover. Morrison had no idea what it was taking on with Safeway. Integration needs preparation, management and control. Sufficient financial and management resources are essential. Research by AMR International shows that the ideal target is 5% to 10% of the acquirer’s size; minimising the problem of insufficient integration resources.
5) 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 spell disaster. If the cultural differences are ignored or the acquirer adopts winner’s 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 model 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. In many instances, failure is due to a combination of mistakes. Success requires planning, strong management and good advice.
Putting the gloom to one side, the upside of successful acquisitions is substantial. They can make money in their own right; 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.
Denzil Rankine is chief executive of AMR International and author of Why Acquisitions Fail: Practical Advice for Making Acquisitions Succeed.