“Mergers and Acquisitions is a mug’s
game” according to Roger Martin “in which typically 70%-90% of acquisitions are
abysmal failures. Why is this so? The answer is surprisingly simple: Companies
that focus on what they are going to get from an acquisition are less likely to
succeed than those that focus on what they have to give to it.”
The logic is sound and sensible, yet in
a world of corporate greed the trend has become more towards the former, i.e.
‘what are we going to get from this?’ It’s sad, to say the least that today’s
leaders are more business savvy; and some notable failures include, “in 2015
Microsoft wrote off 96% of the value of the handset business it had acquired
from Nokia for $7.9 billion the previous year. Meanwhile, Google has unloaded
for $2.9 billion the handset business it bought from Motorola for $12.5 billion
in 2012. HP has written down $8.8 billion of its $11.1 billion Autonomy
acquisition; and in 20111 news Corporation sold My Space for a mere $35 million
after acquiring it for $580 million just six years earlier,” (p.44).
The problem was “Microsoft and Google
wanted to get into smart-phone hardware, HP wanted to get into enterprise
search and data analytics; and News Corporation wanted to get into social
networking. When a buyer is in take mode, the seller can evaluate its price to
extract all the cumulative future value from the transaction – especially if
another potential buyer is in the equation. Microsoft, Google, HP, and News
Corp paid top dollar for their acquisitions, which in itself would have made it
hard to earn a return on capital. But in addition, none of them understood
their new markets, which contributed to the ultimate failure of those deals,”
(p.44).
One issue with the approach of seeking
acquisitions for the sole reason of what the organization thinks it can get from
it, means that it’s unlikely the organization will ask ‘how can we contribute
to its future growth’ and ‘do we have compatible cultures so that the
leadership will fit and be a positive influence (rather than a destructive
force)’ – all they see is their ‘dream’ of dollar signs and just lose complete
focus in the frenzy for profit maximization.
Sadly the focus on mergers and
acquisitions has become very polarized – taking place for two very basic
reasons (1) the perceived financial gain for the ‘buyer’ (and often, only, with
a short term focus) and (2) the feeling of power it brings to the ‘buyer’ –
i.e. I’m more powerful than you – I’m buying you. The very real danger with
this approach is that the culture of the acquisition company has often already
turned negative on the ‘buyer’ long before the acquisition is finalized and is
often so ‘broken’ that the acquiring company don’t have a chance of turning the
culture around.
It’s simple human psychology – but since
the buyers ‘eyes’ only see the dollar signs, they forget that it’s the human
capital that makes the company a success. Failing to ‘buy over’ the employees
with the deal ultimately leads to a total disaster and a lose-lose for everyone
involved; and yet too many organizations, who should know better, continue on
this destructive path.
The current trend on only focusing on
short-term wealth creation loses sight of the very basic human aspect of all
successful businesses and is a sorry reflection on how blind today’s corporate
boards and shareholder institutions have become to the very basic fundamental
ingredients of business success.
Yet as Martin highlights “if you have
something that will render an acquisition company more competitive, however, the
picture changes. As long as the acquisition can’t make the enhancement on its
own – ideally – with any other acquirer, you, rather than the seller, will earn
the rewards that flow from the enhancement. An acquirer can improve its
target’s competitiveness in four ways: by being a smarter provider of growth
capital; by providing better managerial oversight; by transferring valuable
skills; and by sharing valuable capabilities,” (p.44).
This is where the smart money should be
investing in organizations and their leaders who look at how they can add true
value to the acquiring organization. This is the win-win scenario and if ‘sold’
correctly during the acquisition process will lead to a positive culture and an
excited ‘joint’ workforce – looking to be ‘stronger’ together than they were
apart. This isn’t about ‘power’ but synergy.
Finally Martin mentions how “right now,
CEO Mark Zuckerberg is hailed as a business genius, Facebook has become one of
the most valuable companies in the world, and his shareholders are perfectly
happy to watch him fork out $21.8 billion for a company (WhatsApp) with a
handful of engineers and $10 million in revenues. As long as the stock price
keeps rising because the base business is prospering, acquisitions don’t have
to actually make sense. But history shows that when things turn sour for the
base business – think of Nortel, Bank of America, WorldCom and Tyco –
shareholders start looking more closely at acquisitions and asking, What were
they thinking? That’s why it pays to have a strong strategic logic for your
acquisitions, even when the market isn’t asking for it. And what the acquirer
puts into the deal determines the value that comes out of it,” (p.48).
References:
Martin, R. L. (2016). M&A: The One
Thing You Need to get Right. Harvard Business Review, June, p.42-48.
