Why Are We So Bad At Acquisitions?

Campbell Soup acquired Bolthouse for $1.55 billion in 2012 to enter the fresh food category and earlier this week announced it was divesting of the company for $510m to Butterfly Equity, an LA based PE group.

PWC conducted a survey in 2013 of 106 executives at Fortune 1000 companies concerning the Strategic, Financial and Operational success of their M&A activity. Just over 60% claimed strategic success, under 50% claimed financial success and an eye watering 33% (barely) claimed operational success.

In January 2008, Bank of America announced the acquisition of Countrywide for $2.5 billion. The post-acquisition costs since that deal was announced have allegedly reached over an additional $50 billion. That’s like spending $1m on a condo and then $19m remodeling!

Autonomy was acquired by Hewlett-Packard (HP) in October 2011. The deal valued Autonomy at $11.7 billion (£7.4 billion) with a premium of around 79% over market price. Within one year HP had written off $8.8 billion of Autonomy’s value. In 2016, HP agreed to sell its Autonomy assets, as part of a wider deal, to the British software company Micro Focus.

The acquisition of another company continues to be a graveyard of failed dreams, disappointments, and of course some bad luck.

Why are we so bad? One extensive research project highlighted the key element of success. “The Good, the Bad, and the Ugly by Moeller and Scott, A Guide to M&As in Distressed Times, reviewed 12,339 deals between 1984 and 2008. Their conclusion: Success is primarily determined by Post-acquisition integration.

At The Portfolio Partnership we have built an acquisition process based on fixing decades of mistakes in M&A and not just in the post-acquisition area.

Below we set out key sections of the process and where mistakes are made.

Strategy

1. The deal is ego driven, a prize being chased by an over exuberant chairman executed in a frothy market where everyone seems to be doing deals.
2. The logic from a strategic point of view is weak. The SDL story .
3. Acquirers buy what’s up for sale.
4. Mistaken identity. Laidlaw Buses acquires an ambulance business (that’s a healthcare business not a bus business).

Acquisitions are a tool to execute an insightful strategy. You need to be clear on your direction and buy things you want to buy, which may or may not be up for sale.

Search

1. Acquirers take a passive approach to target identification. Hoping investment banks and brokers will bring them relevant deals (which of course are up for sale).
2. The search criteria are flawed. There’s a parallel here with acquiring talent. Often the search criteria are way too broad resulting in 1000s of irrelevant results or too narrow resulting in zero targets.
3. There is a disconnect between the well thought through strategy and the search criteria.
4. The degree of integration difficulty is never considered at this early stage. Therefore overseas small targets appear on the list, without considering the investment of time and money required to execute the post-acquisition strategy in France, Japan, Ireland, New Zealand etc.

Building an Acquisition Profile which highlights on one page the essential elements of the potential targets is key. The nature of the business, sectors, size, location and yes even the ideal cultural values are worth trapping. A practiced acquirer can often tell, from a deep dive into a target’s website prior to any meetings, that there could be integration challenges!

Target Assessment

1. The acquirer has weak empathy for entrepreneurs resulting in poor first impressions.
2. A public company arrogance is demonstrated to the smaller private company owners.
3. The acquirer’s story telling is weak and an opportunity to sell the virtues of the potential new owners is missed.

When you are buying you are selling. You are selling the sizzle, the excitement of enhancing people’s careers. It a chance to confirm the need for the target’s talent to stay and build a new future. These meetings are not just about acquiring information but about assessing the fit. The cultural fit, the strategic fit and the potential for a successful financial outcome for everyone. Each buyer stands in a unique set of shoes, their own!

Pricing & Negotiation

1. Because the post-acquisition strategy has not been considered up to this stage, the value of acquiring the target is not fully understood resulting in bad pricing.
2. Equally a lack of rigorous integration thinking results in the wrong deal structure e.g. the acquirer intends to fully integrate all departments into their organization making an earn-out deal structure linked to profits performance impractical.
3. The negotiation skills of the acquirer are weak, partly from a lack of practice. The seller on the other hand has spent the last 10 years negotiating in the weeds to win attractive customer contracts.
4. The acquirer lacks the curiosity to question a seller’s position on an issue, leading to misunderstanding and a lack of trust.

The final stages of negotiating private company acquisitions are all about building on a foundation of trust and knowledge from previous meetings and analysis. Practiced acquirers are always calm, polite and in control. These can be tense meetings where the sellers are discussing a lifetimes work. These meetings take care and skill. They often involve using questions to understand positions and an empathy level most acquirers don’t possess.

Due Diligence

1. These are often missed opportunities where the priority seems to be to validate financial performance. Of course all forms of due diligence have a data validation element but they a golden opportunity to validate your post-acquisition plan. Will your post-acquisition IT, sales, finance, production plans really work?
2. It’s a missed opportunity to assess the senior leadership team you’re acquiring. Not enough emphasis is placed on understanding how they act and think in a social setting.  How they’ve solved problems encountered in the past.
3. Critical issues uncovered are not flagged up and discussed with the seller because trust is weak. Instead due diligence issues are used as weapons to bring the price down.

Successful due diligence teams clarify up-front with sellers what the scope of the investigation will cover. The team clarify the important issues they are basing the deal on. Not just financial but strategic, people, customer and cultural reasons. This gives the seller some warning of the acquirer’s priorities.
This is always appreciated by sellers and continues the open, transparent platform that has been built.

Post-Acquisition

1. Often the acquirer doesn’t appoint an Integration Director to project manage the 120 to 160 day integration phase.
2. There is no onboarding of acquired staff with no nurturing plan.
3. Communication is weak immediately following the town hall meeting announcing the deal.
4. A post-mortem is not conducted resulting in a lost opportunity to get better at acquisitions after every single deal.
5. The target staff are not involved in departmental integration projects resulting in little or no buy-in to the success of the deal
6. Deal objectives and success criteria are never defined.

Our model demands that post-acquisition planning is built into the early stages of the acquisition process and revisited continuously up to and beyond closing. We believe you need to approach acquisitions like buying a house assuming the family in the house are coming with the deal! Acquisitions are for operators. Really good acquirers are also really good at running businesses.

Our Acquirer’s Playbook sets out our process map packed full of operator tips. Of course you can read as many books as you like on golf, but it doesn’t make you Tiger Woods:)