Should We Brace Ourselves for Another Era of M&A Value Destruction?
It looks like more mergers and acquisitions are on the horizon. Time and again, why do so few mergers and acquisitions meet expectations? Is the information about human resources just too difficult to obtain during a sensitive acquisition process?
In the end, M&A is about buying more volume. It is a flawed process, invented by brokers, lawyers, and super-sized, ego-based CEOs." With this comment, Ellis Baxter summed up the thinking of the majority of those responding to the April column. Edward Hare put it in more graphic terms: "Acquisitions are a macho exercise, not an intellectual one. Think World Wrestling Federation, not a chess tournament." Stephen Alexander adds: "Those promoting an acquisition are often dealmakers whose interest in the transaction often stops when the deal is closed." Jean-Marc Frion opined that, "Only in certain circles, such as family where both parties sincerely want the good of the other and are not motivated by greed, can there be deals in which neither of the two loses."
Does it have to be this way? Several respondents pointed out reasons why mergers and acquisitions fail to achieve their objectives, suggesting possible remedies to this "flawed process." Kathryn Yates, for example, cited three primary reasons for M&A failure: "1) Forgetting to plan for the cost of integration 2) Side deals. Putting the best manager (no matter the company source) in charge is always the best plan ... 3) ... thinking that a top-down communication, sent once, is sufficient." Marcus Dancer blamed some of the problem on the way that executives are compensated. In his words, "Because executives are frequently compensated in an asymmetrical fashion (for example, through stock options), it is in their financial best interest to do M&A to add volatility to their business."
Is M&A part of the natural Darwinian process of business, or is it rigged to produce inferior species of companies, as measured in terms of value created for customers, employees, and shareholders? If the latter, is it the natural result of a system of incentives geared to short-term financial rather than longer-term business benefits? And what does it say about the overall future strength of industries caught up in consolidation? Or, as some critics claim, are we caught up in research that fails to adequately measure the benefits of M&A (particularly in situations where one of the partners is especially weak) while concentrating on the disadvantages? What do you think?
The recent return of higher enterprise market values as well as greater disparities between them suggests that an upturn in mergers and acquisitions can't be far behind. Unfortunately, if research is any guide, the operative question is whether more or less value will be destroyed in this cycle than the last, from which many investors (for example, those in the former Time Warner) are just recovering. In pondering this, it is appropriate to give some attention to a recent book, The Human Side of M&A, by Dennis Carey and Dayton Ogden.
Research tells us that the short-term value in an acquisition accrues primarily to shareholders of acquired companies. On the other hand, short-term value is more often destroyed than created for shareholders of acquiring organizations. There are conflicting conclusions about whether mergers and acquisitions contribute directly to long-term value for the surviving organization. What is generally agreed upon is that perhaps as many as two-thirds of all acquirers fail to achieve the benefits planned at the outset of an acquisition. In part, this is thought to be due to the fact that too many acquirers are more concerned about size and top-line growth than value creation. Others approach an acquisition like a conquering hoard, focusing on the numbers while remaining insensitive to the qualities and needs of the human resources being acquired.
Carey and Ogden set out to examine the methods for integrating an acquisition that were employed by a subset of acquirers experiencing significant long-term, post-acquisition value increases. They found that these acquirers: (1) performed careful due diligence not only on the easy-to-obtain financial numbers but also the sensitive and difficult-to-obtain information about people and culture, (2) avoided acquiring organizations with distinctly different cultures than their own, (3) created a third strategic vision based on a combination of those of the two merging organizations, (4) quickly identified, motivated, and retained key managers in the acquired company, (5) integrated the two organizations deliberately and swiftly, promoting the best managers from each organization, (6) timed their integration activities to avoid significant disclosure prior to regulatory approval of the acquisition while doing whatever necessary to "survive" a sometimes prolonged regulatory process, and (7) strengthened their board by selectively drawing members from the boards of both organizations.
There is nothing here that is earth shaking, although it is clearly harder and more complex than it sounds. But if the roadmap is clear, why do so few mergers and acquisitions meet expectations? Are so many supposed benefits factored into the acquisition price that it is difficult to realize value for the acquirers? Is the information regarding human resources just too difficult to obtain during a sensitive acquisition process? Or do acquirers talk a good game about the importance of targeting and retaining talent without really believing it or making the effort to follow through? Should we get ready for another era of M&A value destruction? What do you think?