Companies
continue with their expansion plans regardless of the fact that after
acquisitions up to 70% of them lose their value and report worse results than
the branch average after the transaction is over. Companies still show buying
appetite despite the economical crisis, even though the amount and value of
worldwide mergers & acquisitions is much lower than during the “golden age”
between the years 2005-2007. They feel confident that they have learnt their
lessons of proper calculation of risks and opportunities resulting from
buy-outs. Corporations understand that during the time of market polarization,
they need to be among the top two in each market segment; or that they have to
own distinctive premium niche or value for the money segment; as all those remaining
ones in the middle are squeezed and exhausted. It becomes clear, that if companies
want to survive in the long run, they either continuously innovate their own
brands and technology, or they buy them from the market.
Only About One Fifth of All Transactions Bring Expected Return on Investments
Shareholders
and supervisory boards approve giant mergers & acquisitions (M&A) and
accept a high risk of not achieving adequate return on investment (ROI), because
most of the time they see buy-out as the only way towards fulfillment of the
companies’ ambitious growth targets and thus towards the growth of the share
price. The companies’ management is then empowered and made responsible to
fulfill acquisition objectives - ranging from penetration of new segments or
new geographies; through increasing profitability thanks to synergies,
economies of scale and increasing negotiating power on the market; towards
increasing attractiveness on the investment market.
The
acquired company must strategically fit with the long-term goals of the
‘mother’ company. Management of expectations is however one of the crucial
success factors – one must balance the benefits coming from buyouts vs. the
value that can be generated by in-house innovations. When the NIKE Company bought UMBRO for 580 million dollars in 2007,
NIKE for sure did not anticipated that five years later (in 2012), it will sell
UMBRO for less than a half of its value (225 mil. USD). Now, NIKE mainly
focuses on the football area on its own innovation. The development of own
brands can bring slower growth, however with a higher average rate of return
thanks to the medium need for investments. On the other hand, the effects of
acquisitions are quicker; even though the yield decreases due to the high
capital need.
Strategic
fit is not the only criteria for success when the main acquisition target is to
keep or to obtain competitive advantage by buying know-how and new technology.
The buying company must also have in-house capabilities to further develop the acquired
company. This aspect is not always understood. Microsoft learned a painful lesson last year, when it had to
write-off 99% of the value of the Internet agency aQuantive, acquired in 2007 for 6.3 billion dollars. Original
expectations to keep up with Google’s DoubleClick
(acquired in 2007 for 3.1 billion USD) were not fulfilled. Google’s subsidiary DoubleClick, on contrary, survived and now it focuses
on uploading ads and reporting their performance.
Adequate acquisition
price is always a key to success. A too high price can indicate future
problems, as it increases pressure for dramatic cost cutting to backwards justify
the transaction value. In 2012 it was a case of Google wanting to more aggressively compete against Apple. Google paid 12.5 billion dollars
for Motorola Mobility - to acquire
17,000 patents and 7,500 pending patents. According to experts, this price was
too high to be defensible. Three months after the transaction was over, Google released
4,000 employees (one fifth of all the staff). Many experts do not see the strategic
fit for this vertical integration (software vs. hardware), thus future success
of this buy-out is very questionable. On contrary, horizontal strategic
integrations normally record higher success rate, because the expected
synergies and growth opportunities can be more easily materialized (like in the
case of You Tube being acquired by
Google in 2006 for 1.65 billion USD).
Acquisition Success Increases With Aligned
Strategies and Companies’ Cultures
Company
cultures’ disharmony destroys up to 30% of the deals. Daimler AG (German producer of e.g. Mercedes-Benz luxury automobiles)
learnt its lesson after the fusion with an American low cost car producer
Chrysler. In 1998, Daimler bought 92% of Chrysler
for 36 billion dollars and the so-called ‘Merger
of Equals’ ended up in 2007 by the sale of Chrysler for just 7.4 billion
USD. Differences between German and American ways of management, the level of
formality, and operations in different price segments, contributed to the
failure. The initial euphoria was exchanged for a fiasco, once the German
cultural model prevailed and motivation of the American employees declined
bellow a reasonable level.
Companies for Sale: The Size Matters
According
to the Boston Consulting Group analysis, transactions bellow 1 billion dollars,
when a bigger company acquires a smaller one, show higher probability for
success. Otherwise, during the so called ‘mergers
of equals’, problems of integration of two wide portfolios arise. Managers
have difficulties to prioritize brands and investments; they struggle to decide
which brands have the highest potential for growth and which are the most
important for the current profit generation. Personal preferences also matter. Most
of the time, leaders from acquiring companies behave as conquerors in a foreign
battlefield: they give the highest priorities to their ‘own’ old portfolio;
they do not thrive to keep the people and know-how of the company that is taken
over. The acquired business loses its roots and continuity.
Historically,
the most costly transaction happened in the year 2000, when Vodafone bought Mannesmann AG for 183 billion dollars. Even though the time of
overpriced acquisitions is over, we can expect that successful companies will
continue to finance their expansion and look for attractive acquisition
targets. Managers learned that the highest growth and return on investment could
only be achieved by the combination of organic growth and external buy-outs.
