Why do Most Acquisitions Fail to Deliver

Why do Most Acquisitions Fail to Deliver

August 23rd, 2016 // 6:36 pm @

MHAcqAcquisitions can be an excellent way to increase shareholder value, however the majority of acquisitions fail to meet the financial goals set for them.

Acquisitions by large tech companies have become a trend in recent years where companies use acquisitions to stay at he forefront of technology in their industry, by identifying possible trends or new technologies that may threaten their business, and rather than try to build a competitor internally they buy whoever is at the forefront of this new trend. This allows them to quickly remain at the forefront of their market, and as many of these acquisitions are made using their highly priced shares, it has proven for some an effective strategy. Facebook has made 59 purchases in its 11 years; Apple has made 81 acquisitions since 1988. But Google has gone further with 197 in 15 years, that is more than one every month.

Other companies have been noticeably less successful, with Microsoft seemingly unable to make any major acquisition that it does not then have to write down in value. Its worst was buying Nokia in 2013 for $7billion, and writing off the complete cost in 2015.

These are the acquisitions successful and not so, that make the news, but hundreds of less newsworthy acquisitions are made every day, and the reality is most fail to deliver the financial gains promised.

Having worked both sides of the acquisition game I have seen it done extremely well, and equally I have seen some poorly thought through and executed acquisitions.

The issues often start with the CEO and senior management of the acquiring company. It is for them to lay out the strategy that turns an acquisition into added shareholder value. Such plans tend to be either poorly thought through, or overly optimistic, and rarely include specific action plans and identified financial benefits. Sadly ego plays a part in this, senior managers too often enjoy the excitement of acquisition over the more humdrum work of making their core company better. Too many CEOs are ego driven normally and the lure of acquisitions feeds into that ego. Making acquisitions looks dramatic and forceful, and this can easily overrule fiscal good sense.

Therefore too often even before acquisition talks have started they are burdened with overly optimistic financial goals, and little thought having been given to downsides and risks.

Then the issue of price comes to the fore, every acquisition has a price at which it no longer makes sense. The problem is once all the internal work has been done on a potential acquisition and the board has been briefed, it is hard to walk away if the price becomes too high, it is fiscally prudent but can look like a failure.

The obvious advice from this insight is when selling, leave the price discussion as late as possible, and do all you can to help the acquiring company to a point where it has emotionally bought into the acquisition. I have been more that once amazed how far an acquiring company will go down the acquisition route without knowing what they would have to pay.

Therefore by the time many acquisitions are made, the price is higher than expected and the financial benefits are overly optimistic.

Then one gets to the most difficult part of the process, actually integrating the companies and delivering the financial benefits.

Every post acquisition plan is different, dependent on the strategic reasons for the acquisition. But whatever the plan is, it takes significant managerial focus to make it work.

Their needs to be a team with the expertise, the time and the authority to make the plan work. Part of the problem is that often to deliver the financial benefits involves difficult changes that need to be made, and without a disciplined process these changes can slip back in time, or even never happen.

Acquisitions can be a very powerful tool in adding shareholder value, but they require disciplined management at each stage:

  • One must have a clear strategic plan of why the acquisition makes sense.
  • This must be developed to a clear list of actions post acquisition, with detailed timelines and fiscal budgets.
  • A maximum price at which this no longer makes fiscal sense
  • An implementation team, with clear goals and financial targets.
  • Regular reviews of whether the fiscal targets are being meet.

Acquisitions can be great for both the acquiring and acquired company, but they are much harder to do well than most imagine.



Category : Blog &Business Strategy &CEO

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