The WSJ last week highlighted the evidence that some of our largest rock star brands just can’t get acquisitions right.
HP, Boston Scientific, Nasdaq OMX Group, Frontier Communications Corp and Republic Services have all achieved the amazing result of paying so much for acquisitions that the goodwill on their balance sheets is worth more than the whole company on the stock market.
Let’s be clear, the goodwill on these companies balance sheets isn’t the purchase price they paid. It’s worse than that. Goodwill is the net price after deducting from the purchase price the assets acquired. For example HP paid $10.7 billion for a software company called Autonomy. 66% of that price or $6.6 billion was goodwill or the premium they paid over the balance sheet assets. So by the end of the year HP has spent so much on Goodwill on of all their deals that it exceeded the value of the whole of HP.
It is quite common in technology acquisitions to have to pay Goodwill. After all the basis of the valuation is often a multiple of sales or earnings. The problem arises when the multiple used to value the target is so much higher than the acquirer’s that unless you can squeeze out synergies, the deal will always create unjustifiable chunks of Goodwill. And as we all know finding synergies is about as difficult as finding a professional cyclist who uses drugs purely for recreational purposes.
So true – but why does this happen so often? I suggest it is often the people issues. Trying to mix two very different cultures. An entrepreneurial company bought by a bureaucratic one will often lose many key people. More attention paid to the people merger, might reduce some of the failed business mergers.