Several studies on mergers and acquisitions in the last two decades or so have found that more often than not these transactions do not produce the anticipated gains. So many mergers fail to deliver what they promise that there should be a presumption of failure. The burden of proof should be on showing that anything really good is likely to come out of one.
Five Sins of Acquisitions:
It appears that acquisitions are plagued by five sins: straying too far afield, striving for bigness, leaping without looking overpaying and failing to integrate well.
Straying too far Afield: Very few firms have the ability to successfully manage diverse businesses. As one study revealed, 42 per cent of the acquisitions that turned sour were conglomerate acquisitions in which the acquirer and the acquired companies lacked familiarity with each other’s business. The temptation to stray into unrelated areas that appear exotic and very promising is often strong. However, the reality is that such forays are often very risky.
Striving for bigness: Size is perhaps a very important yardstick by which most organizations, business or otherwise, judge themselves. Hence, there is a strong tendency on the part of managers whose compensation is significantly influenced by size to build big empires. The focus on size may lead to unwise acquisitions. Hence, when evaluating an acquisition proposal, keep the attention focused on how it will create value for shareholders and not on how it will increase the size of the company.
Leaping before Looking: failure to investigate fully the business of the seller is rather common. the problems here are: (1) the seller may exaggerate the worth of intangible sets (brand image, technical know-how, patents and copyrights and so on), (2) the accounting reports may be deftly window dressed and (3) the buyer may not be able to assess the hidden problems and contingent liabilities or may simply brush them aside because if its infatuation with the target company. Veterans in this game strongly argue that the negotiating must searchingly examine the other side’s motivations.
Overpaying: In a competitive bidding situation the naïve ones tend to bid more. Often the highest bidder is one who overestimates value out of ignorance. Though he merges as the winner he happens to be in a way the unfortunate winner. This is referred to as the winner’s curse hypothesis. In the heat of a deal, the acquirer may find it all too easy to bid up the price beyond the limits of a reasonable valuation. Remember the winner’s curse. If you are the winner in a bidding war, why did your competitors drop out?
Failing to integrate well:
Even the best strategy can be ruined by poor implementation. A precondition for the success of an acquisition is the proper post-acquisition integration of two different organizations. This is a complex task which may not be handled well. Relationships with customers, employers and suppliers can easily be disrupted during the process and this disruption may cause damage to the value of the business. Aggressive acquirers often they can improve the target’s performance by investing better talent but need up chasing much of the talent out.
A disciplined Acquisition
As the chances of failure in an acquisition can be high, it should be planned carefully. It pays to develop a disciplined acquisition program consisting of the following steps:
1. Manage the pre-acquisition phase
2. Screen candidates
3. Evaluate the remaining candidates
4. Determines the mode of acquisition
5. negotiate and consummate the deal
6. Manage the post acquisition integration