Sunday, February 25, 2018

Why Do Mergers & Acquisitions Fail?

“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).
Martin, R. L. (2016). M&A: The One Thing You Need to get Right. Harvard Business Review, June, p.42-48.