In my experience there are numerous reasons why acquisitions fail. The most common reasons may surprise you. All of these examples have happened to me and therefore my Playbooks have improved over time! Here are a few thoughts:
- First the research: Cass Business School, concluded from detailed research covering 12,339 deals including 2917 acquisitions of distressed companies from 1984 to 2008 that price was not the determining factor for success but that post acquisition integration was the key. So the research is really clear – post acquisition planning is critical. Remember it’s not like buying a house unless you buy the family that’s inside it!
- Further specific research done on experienced acquirers also reveals that a lack of postmortems continues a pattern of failure. Or only those that invested in postmortems after the deal got better at doing deals. Which of course we all know, it’s not so much how much we do of something, it’s how we much learn from each time we do it.
- Diversification can be a bad idea accelerated by the technique of acquisitions. Laidlaw, the largest school-bus operator in North America bought heavily into the ambulance business in the 1990s. Ambulances are not transport businesses they are medical businesses. Big mistake.
- Acquirer’s seek scale by buying what’s up for sale (presented to them by their friendly investment bank) instead of buying what makes sense strategically.
- The most expensive acquisition you may ever make is the $1 price tag purchased out of Chapter 11 because the post acquisition costs to fix it run into the millions of dollars. The Cass Business School comes to this conclusion in their research. Distressed acquisitions are draining on the acquirer. The long term performance and shareholder returns of acquirer’s of distressed businesses show a deterioration of value. This demonstrates the challenges of integration are real.
- I’ve seen key customers of the target company leave soon after the deal completes because of a deterioration of customer support. Have your detail TLC campaign ready to rock n roll on day 1. Acquirer’s need to explain to key customers of the target in person their strategy. I like to do this twice. First in due diligence to test their appetite for the deal and then post completion to reassure them of our commitment to servicing their requirements.
- The synergies identified by the buyer that made the deal compelling on paper were never achieved in practice through poor execution. Appoint a post acquisition integration project manager who must own the changes needed.
- And related to point 7. – The target was never integrated properly into the acquiring group. A second-class citizen culture eventually developed and the results were poor. Again the appointment of a dedicated integration project manager can help to prevent this happening.
- The earn-out rules were so strict as to demotivate the acquired management who left soon after the deal was completed leaving the company in difficulty. Be smart and safe about the detailed earn-out rules. They need to cover your downside but inspire the newly acquired management team.
- The cultural differences were underestimated and after a few years of tension, the acquired company eventually exited the group via a MBO. In due diligence try to really understand how the target company operates day to day. How they forecast their sales pipeline, win business, hold meetings, and reward staff. Try to imagine how your culture would operate within this business. Is there a mismatch? Maybe you need to walk away.
The Portfolio Partnership designs and executes acquisition strategies as part of an overall plan to scale businesses aggressively but safely.