The acquisition of another company continues to be a graveyard of failed dreams, disappointments, and of course some bad luck. In a recent article in the HBR the failure rate cited based on most surveys is an eye watering 70% to 90%.
It’s easy to find deals that didn’t work. Household names that failed.
- Campbell Soup acquired Bolthouse in 2012 for $1.55 billion sold, it for $510m 5 years later.
- HP acquired Autonomy in 2011 for $11.7 billion. Within one year HP had written off $8.8 billion of Autonomy’s value.
- In 2015, Bayer was the most valuable German company at a value of $128 billion. The $63 billion Monsanto deal closed in June 2018. Today Bayer’s market capitalization is now $58 billion.
The research is building behind why we fail.
- 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.
- 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. Our central tenet. Acquirers are for operators. Our process map was set out in the book The Acquirer’s Playbook and demands that operational expertise is seamlessly integrated into the deal team. In this six-part blog series we will break down the six stages of the process and why acquisitions are failing and how to change the odds of success. First up is Strategy.
Acquisitions are a terrible idea if you’re unclear in which direction you want to travel!
Here is a summary of the common mistakes we see happening during the acquisition process:
- Management believe acquisitions are a strategy instead of a tool to fulfil your strategy. Consequence – Buyers are buying what’s up for sale, not want they want to buy.
- Acquirers are confused about their positioning. They’ve lost sight of their super-powers, their DNA and what makes them remarkable. Consequence – Acquirers diversify into new territory without understanding the dynamics of the sector, how to integrate the target and how to make money.
- Integration challenges are often overlooked. The myriad of targets, multiple locations, and the variety of cultures are taken for granted. Consequence – The integration strategy is built on sand and lacks credibility from day 1.
- Researching a quick map of the players is not conducted to validate the potential success of acquisitions. Consequence – Time is wasted looking at sectors with embryonic players that will not fulfil strategic goals, or the chosen sector has been picked over by large acquirers leaving few if any independents worth pursuing.
- The Acquisition Profile is poorly defined and uses phrases like niche, high growth, leading edge. Consequence – impossible to search for targets with wooly criteria.
Strategy a better way
To address these issues, we suggest the following strategies:
- Be crystal clear on the strategic plan. What is your north star? Which market do you want to lead and outperform your competition in? To achieve success in M&A, we recommend a strategic workshop with the key leaders present, insightful position papers distributed before the event and a focus on generating an Acquisition Profile that outlines the types of attractive targets that align with the company’s strategy.
- Acquisitions can be used to fill a strategic void within a company by providing access to new technologies, markets, or expertise that the company does not currently possess. However, acquirer’s need to be careful that the post-acquisition plan makes sense. Is the target management assumed to stay on after the deal? As you plan to add more capabilities to your value proposition, have you worked out your story to customers? Do you need to validate the technology with expertise outside your company?
- Post-acquisition planning is often done in our opinion, too late in the process. Planning of this nature should influence the type of target you prioritize, should dictate how you assess the target, and how you value the business. Of course, due diligence is a great place to validate your post-acquisition strategy. In simpler terms, acquirers need to think post-acquisition integration throughout the M&A process not just at completion.
- In the strategic phase of our process, we like to check that reasonable targets actually exist! It’s a quick and dirty check that for example the target sector contains a few dozen private companies with revenues of $10m to $100m.
- Our Acquisition Profiles cover the essentials: Main activities of the target (e.g. IT contract recruitment, Additive manufacturing, high precision die-bonding), ideal revenue size, locations, specific technology requirements, investment thesis, business model, recurring revenue model, profit margins, and end user market size.
By taking a rigorous systematic approach to acquisitions starting with the strategic phase, acquirers have the potential to execute deals that are seen as a success, not at close, but many years down the line when the success can be measured.