The number and size of corporate mergers and acquisitions continues to boom. The business press carries the stories of how these potential transactions could reshape markets and add value to the acquiring firm. Regardless of the enthusiasm and hype, the facts are that many of these acquisitions will not meet stated expectations, and in fact will destroy value. Further, some of these deals can be disastrous for the business. The risk is that massive shareholder destruction will occur as businesses falter; customers become disgusted and employees are dislocated. It is interesting to note that often when transactions are announced, shareholder price and value for the seller increases, while the opposite happens for the acquirers. Investors are aware of the risks of value destruction for the acquiring firm.
Creating value is not mysterious and doesn’t require the proverbial “rocket scientist” to figure out. The actions needed to create value rather than destroying value are straightforward. Yet, for a variety of reasons management teams execute these actions poorly or ignore them all together. Why? First the obvious, virtually all of the reasons for the value destruction involve people. In the passion and pressure of getting a deal done, managers forget about their people. The arrogant assumption is that people will be excited about the transaction and will “fall in line”. Often those assumptions are wrong. We call this the Conundrum of People in M&A.
This conundrum of people is where many acquisitions go off the rails. This includes dynamics during the negotiations as well as execution post-acquisition. Let’s look further at the causes:
1. Making Faulty Strategic Assumptions
A primary cause of value destruction is having an unclear strategy and picking the wrong target. Faulty strategic assumptions involve not being crystal clear about the business strategy for which making acquisitions is based. It is important to remember that making acquisitions is NOT the strategy, but rather one of the methods of executing a strategy. Unfortunately, too often executives who cannot figure out how to grow their business resort to making an acquisition. The classic line used to justify the transaction is “1+1=3”. While this phase sounds good, often the reality ends up being “1+1=1”, since an acquisition does not constitute or guarantee a growth strategy. Rather than growing the business, a failed acquisition only makes things worse.
Acquisitions made with faulty strategic assumptions lead to a flawed expectation of increased capability to meet customer needs, expanded geographical presence and capturing competitive advantage. Value is destroyed when the offerings of the integrated business do not lead to increased margins and sales with customers, expanded geographies, and competitive presence. The strategic error comes from faulty thinking about future events. This leads to failing to cover the cost of the acquisition and value destruction.
2. Ignoring Organizational and People Issues
A second cause of value destruction occurs in due diligence as the acquiring firm misreads the “essence” of the organization which is being targeted for acquisition. Negotiating a transaction can be like a romance, where passion obscures the stark realities of “getting married”. During this courtship both parties talking about “what could be”. Like in a romance, once the two parties are together there are often unpleasant surprises. Examples of these important organizational and people differences are:
- Core values
- Business models
- Leadership styles
- Organizational capabilities
- Organizational cultures
- Getting caught up in the passion of making a deal
3. Allowing Impaired Judgement
A third cause of value destruction comes from impaired judgement due to the “passion of the deal.” It is said that power is among the most potent drugs. Being part of a deal team and negotiating a transaction has seductive power which can quickly overcome “good judgement”. The passion and power are so strong that it is easy to overlook potential risks about the prospective acquisition and miss market and product changes. The dynamics and thrill of getting the deal done move to the foreground and puts good judgement and the original intent in the background.
4. Paying Too Much
Perhaps the most impactful consequence of a management team getting caught up in the passion of making a deal is paying too much for the acquisition. If the price paid for the acquired business was too high, there is no way the post-acquisition integration can overcome that mistake. It is simply a hole that is too deep to dig out of. Further, when the price paid is too high, the involved executives attempt to cover up the mistake with other “strategic moves”, which ultimately make the situation even worse. It is often said that the one mistake which cannot be overcome is paying too much. Investment bankers often earn their fees by getting the buyer to pay considerably more than they intended, and in many cases, was justifiable. Investment bankers often pressure managers into paying too much, which of course happens in the passion of the “buying fever.”
5. Allowing Poor Post-Acquisition Integration
Among the most common sources of value destruction is flawed post-acquisition integration. There is often an assumption that getting the deal closed is the hard part. That is a fatal mistake.
Creating value in acquisitions requires leadership which inspires people. This involves:
- Creating context for challenging and listening to challenge regarding price, terms and conditions for a transaction. Leadership by those proposing the transaction as well as those involved in the deliberations is critical to mediating the temptation to overpay for a transaction in order to “win the deal”.
- Thinking strategically about future value creation of transactions, rather than being swayed by rosy forecasts.
- Leadership and intense commitment to successful integration!
At KingChapman we assist leaders in being vigilant regarding the people and organizational issues which ultimately determine value creation of transactions, but do not readily show up in financial models. We stand ready to explore these people and organizational issues with you.
Half of M&A transactions fail to create value. Ever wonder why? Download our whitepaper ‘The Conundrum of People in M&A’, and understand the critical elements that impact mergers and acquisitions success or failure.
In it, you will learn:
- Eight common flaws in decision-making often made by executives in M&A transactions
- Why the integration process is so critical
- Tactics in organizing, planning, and communicating that lead to successful integrations