The news that two-thirds of acquirers fail to reach their financial performance targets is not new, nor are the reasons. The continuing consternation is that companies fail to learn from the mistakes of others, believing that "our numbers" are more well-founded and therefore not subject to the elements of integration that crashed someone else's ship on the rocks.
Basic fact: Those promoting an acquisition are often dealmakers whose interest in the transaction often stops when the deal is closed. Basic fact: Most companies don't have the management fortitude to take the time needed to do the due diligence of all the organizational factors (people and culture) that are the mark of successful integrations.
Until companies adopt this approach, we will continue to see the same pattern of results and the accompanying dismay by shareholders.
Senior Consultant
Spherion Human Capital Consulting Group
Yes, on average, M&A will be value destroyers because of compensation structures and human needs factors. 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. For example, let's say a company is trading at $10. It can do an acquisition that will either be a great success (stock will go to $18) or will severely hurt the company (stock goes to $2). Say the net value of the deal is -$2. If the CEO were paid in options, he would have a financial incentive to do this deal even if it were destructive on average. As to human needs: We need to grow and we--on average--expect greater outcomes than the actual outcomes.
VP Quantitative Investments
Ontario Teachers' Pension Plan
Value realization is obtained not by capitalizing on managerial knowledge and socializing job loss, but by integrating tacit and codified knowledge at all levels to make a viable operating entity.
An upside in M&A with increased values seems to be most definitely on the horizon, but it needs to be seen if this time around M&A skills have advanced to levels of accurately determining value creation and not just unstable market capitalization.
It is very hard to forecast whether an M&A creates or destroys value. I know that in an M&A between two companies, the sum 1 plus 1 does not always give 2: it can be 3 or 1 depending on the value created for the shareholders, stakeholder, employees, and customers. An Italian saying is "Homo homini lupus": everybody tries to take advantage from a deal. And so the companies do during an M&A process.
Student in strategic management
I've worked on more than a hundred transactions, both on the corporate side and as a consultant, and here are three of the many things that stop senior management from reaching the goals they set.
1. Forgetting to plan for the cost of integration. A year later, results often show that the destruction of intended value can be traced to this issue.
2. Side deals. Putting the best manager (no matter the company source) in charge is always the best plan ... but reality is more likely a "good guy" side deal where longtime managers protect their own. This not only hurts long-term productivity, it also weakens the process and destroys trust.
3. "I already told them." This is the issue of thinking that a top-down communication, sent once, is sufficient. It's closely related to "Why are they so resistant to change?"
Until the soft stuff of communication and HR process are managed with the same kind of discipline as the financial details, value will always be at risk.
Global Practice Director
Watson Wyatt Worldwide
This will probably sound trivial, but experience strongly suggests that in today's world, buying usually means being the loser in the deal. One party has to lose; otherwise the deal would not happen, right? Why would it be different between corporations? Only in certain circles, such as family or close-knit tribes, 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.
Like all decisions based on the money side of the page, M&As are never what they appear. The huge cost in terms of time and legal fees is an outrage. Can anyone name one M&A in which the service to the end user got better? Shareholders do worse in almost all cases. Employee talent is lost to some competing company.
Growth should come from the ground up. If you cannot grow the company ground up, how do you manage a major takeover? The only exception is the takeover of a failed company. Here the core value is obtained at a low cost, the workers who are retained are happy to have a job, and the locations and or plants have low-cost, real value.
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. I prefer being like a farmer and growing the business. In my industry, every attempted M&A beyond a single model has failed.
CEO
Audio Forest, Inc.
I was an investment banker who specialized in M&A for ten years in Europe with a bulge bracket firm. There is an urban legend that "most mergers and acquisitions fail." This is simply untrue. They nearly all succeed, if succeed means increase revenues, margins, and the bottom line over time. As for the other benefits, be careful of the window dressing versus the real rationale for a deal.
Carey and Ogden need to study M&A transactions adjusted for market cycles, which I don't think they did. Furthermore, there is effectively no such thing as a pure "merger" (some corporate freaks such as ABB and a couple of others notwithstanding). One company is always dominant and one management clique nearly always prevails. I don't think taking the "best" employees from both organizations and the "best" directors from both boards makes sense or is even possible. Who is going to determine who the best directors are? How?
It is precisely that kind of warm and fuzzy approach that gives Carey and Ogden their ammunition. M&A doesn't destroy value just because the pre-deal list of benefits isn't met. Look at the ten or twenty largest companies in America by market cap or revenue. Nearly every one of them got there through a combination of organic growth and systematic acquisitions. Even Microsoft is a voracious consumer of smaller technology companies (and potential competitors). Wal-Mart buys supermarkets, oil companies buy each other, Ford bought Land Rover and a bunch of other companies.
In every single case, acquisitions brought key technologies, revenues, customers, market share, and market access. These led to higher sales, better purchasing power (higher margins), and ultimately, higher net income. Acquisitions are proof of corporate Darwinism.
As part of my MBA project, I have done a simple analysis on whether M&A among the banks in Malaysia creates or destroys value. My analysis revealed that it destroys value. The question then, is, "Why do these banks embark on this frenzied M&A exercise?" It is simply to align to the call of the government to be perceived as bigger in size and, hence, stronger in order to counter competition from foreign banks. Does size really matter when it comes to value creation?
Now most merged banks have, in a way, stabilized operationally in Malaysia. It will not be long before the banks will undergo another round of M&A, as the government previously indicated that the bank count would be reduced further. This time around, I believe not only the banks, but even the telecoms will not be spared.
In short, yes: Whether we like it or not, the era of M&A value destruction will take place unless research can negate the correlation between size and value, and re-emphasize that "small is beautiful."
I've been involved in a number of acquisitions over a period of twenty years, and my experience has been that little real thought is given to the effects on people on both sides of the deal. Pronouncements are made about the importance of human talent and morale, but the facts are that executives are driven by the white heat of getting what they want. Often, the strategy/purpose behind the combination gets left behind or is flawed from the beginning. "Winning" the deal is all that matters. And when one wakes up to the lack of synergies to be found and the politics that drove the deal, one finds that the only way to offset the premium paid for the acquisition is to dispose of a lot of people who made the acquired property work in the first place. Acquisitions are a macho exercise, not an intellectual one. Think World Wrestling Federation, not a chess tournament.
Retired Director—Planning and Quality
Fortune 300 Manufacturer
M&A value destruction continues until executive and board decisions factor return on individual, social capital, and long-term individual equity growth into their acquisition investment equations. Executives using emotional intelligence and sharing leadership vision throughout the new organization permit "value growth" to begin when the M&A approval is given. Clarity of communication during these cultural integrations is essential to rebuilding a stronger organization.
Org. Leadership doctoral student
Pepperdine University GSEP