I read an interesting article today by Olivier Pujol. Oliver, writing in iCEO, was bemoaning the fact that acquisitions have a terrible habit of going sour. I would tend to agree and am interested to share Oliver's insights and add my own take.
Surveys show that, on average, mergers and acquisitions destroy value. Highly publicised successes are not sufficient to compensate for disastrous ones. Yet, it is relatively easy to set the ground rules for good acquisitions. In my opinion your professional advisor will claim to know or should know the pitfalls, but at the same time they (professionals) keep getting it wrong or allowing us to get it wrong at an alarming rate:
Oliver says that rules broken include:
• Make acquisitions beyond the scope of their strategy (think ebay nd skype)
• Produce unrealistic business projections to accommodate the demands of the deal (timewarner and aol)
• Fail to implement integration plans (Sprint and Nextel Communications)
• Fail to communicate with all the stakeholders (all of the above)
According to the author; the mechanisms leading to these repeated mistakes are too powerful and overcome experience and wisdom; because M and A is a fascinating activity, with stakes far beyond simple efficient business; because closing an acquisition is a short term objective (we all know how powerful they can be), and making it profitable is a long term activity (we all know how difficult that can be).
Pujol claims that surveys consistently illustrate that:
• one fourth of all acquisitions create value far in excess of initial expectations (very positive NPV [net present value], above budget)
• one fourth of all acquisitions perform less than expected, but pay the cost of capital (positive NPV, below budget)
• one fourth of all acquisitions destroy some value (negative NPV) even though cash flows remain positive
• one fourth of all acquisitions end up generating negative cash flows.
In half of the cases, the buyer would have been better off not doing the acquisition. And worse, the aggregated Net Present Value of all M and A activities seems to be significantly negative. In other terms, we would be better off without M and A.
The economic crisis that we are experiencing has demonstrated at length that professionals with excellent technical skills could work their best to create major failures affecting people’s lives. Some of the lessons learnt were:
- short term goals may lead to major wrong decisions
- excessive trust in technicality obscures economic reality
- self interest make people lose all commonsense
- passion for figures and money challenges consideration for other human beings.
Lessons learnt from acquisitions are very similar in many aspects. But money pains are not the most important. There is much more than figures at stake. All acquisitions result in real people losing their jobs.
But bad integration results in unnecessary and often irreversible damage - human and finacial. And managers should never accept that. It’s not an operational mistake anymore, but a human fault. It is high stakes gambling unless the rules are followed religiously.