We’ve all read the statistics on acquisition failure. We’ve seen shareholders’ cynicism reflected on both sides of the deal e.g. Dell’s acquisition of EMC has prompted shares of VMware Inc., the company 80%-owned by EMC, to drop nearly 30%. Diebold Inc’s announced acquisition of competitor Wincor Nixdorf AG, both makers of automated teller machines, for $1.8 billion in cash and shares has caused the acquirer’s shares to drop 6.1%. This despite the fact the deal creates the largest player in the sector. Cynicism is everywhere. Acquisitions are known to be risky yet, as a public company, almost inevitable to keep the growth moving upwards. So what’s behind this worry? What’s been done so badly and what are the consequences? Here’s a list of horrible habits that happen every day in the real world.
Horrible Habits
1. Acquisition Profiles, describing the types of targets the buyer wants to buy, are disconnected to the Strategic Plan. Consequences: bad targets appear on the shopping list. However, discussions continue because the numbers seem to work but the culture, fit and the ability to integrate properly are flawed. Deal completes but leads to years of missed opportunities until it’s closed down or sold for a fraction of what was paid.
2. Early Assessment Meetings lack diagnostic, precise questions leading to a rose-tinted view of the target. Facts don’t get in the way of a good story! At best reality kicks in, way down the expensive end of the deal and it’s left to the attorneys to burst the bubble of the dream. At worst the momentum of the deal drives it over the line and the deal actually completes! Not a happy ending.
3. Post-acquisition integration planning is left to the due diligence stage, causing fatal issues to be missed. The difficulty of integrating the target could have been surfaced long before a deal was agreed. The buyer should have walked away and was never capable of running the target business. This often happens when product businesses buy service businesses. Some famous acquirers just won’t touch certain types of businesses. There’s a reason why Warren Buffet doesn’t buy technology companies. These misfit deals often lead to key people on the seller’s side leaving within six months of completion, claiming the buyer doesn’t understand their business.
4. Negotiation techniques by the buyer (when buying a smaller private company) are harsh. Fundamental fact, that when you’re buying, you’re selling. You’re selling the benefits of the acquirer including the career opportunities open to all staff, and the ability to go after bigger and better clients. In other words most acquirers lack a “charm offensive”. They show a complete lack of respect for how courageous and tough it’s been to build a $60m business from scratch. Assuming the deal completes, the seller and the seller’s staff remember how they were treated and lean towards the old adage, “don’t get mad get even”, making the post-acquisition integration a nightmare.
5. Due diligence focuses almost myopically on the numbers and the legals. We therefore have the classic missed opportunity of, validating the post-acquisition integration plan, during due diligence. Often this validation would have stopped the deal in its tracks. Key facts would have emerged, like the ability of the sales manager to handle the bigger job you had planned for her. Or the inability of the target’s distribution channels to handle your products.
6. Post-mortem: the key stage of learning from each deal is never executed. Post-mortems don’t happen, missing a golden opportunity to actually build an organization that’s gets better at doing deals. As research conducted by Dr. Koen H. Heimeriks, Stephen Gates, and Maurizo Zollo articulated so brilliantly:”Maintaining a body of M&A knowledge, organizing it into lessons and making it easily accessible are key to developing and leveraging a company’s M&A capability. Without such a framework, companies can slip into applying general types of strategies developed in prior acquisitions that are inappropriate to the one in hand. Managers might also become overconfident by thinking that the mere accumulation of experience brings with it a stronger capability”. Amen.
These are are just some of the tactics I’ve observed in deals over the years, but it clearly doesn’t have to be that way. Reach out for a confidential discussion of your acquisition objectives and how TPP can help. Ian@TPPBoston.com. At least read the book.
