|
Why mergers and acquisitions fail
Introduction
Across all industries mergers and acquisitions have been an important implementation
vehicle for expansion since the 60s of last century. In the IT-space they even have been
the most prevalent method by far. The reasons for this preference seem evident and
compelling. Nevertheless at best they have a checkered record of success. Most of us
can corroborate this conclusion by our own observations, but it is strongly reinforced
through a recent X-European study by the leading French business school. According to
their analysis 70% of all mergers and acquisitions end in failure or can only be turned
around at excessive additional effort and cost, whilst only 10% clearly meet or exceed
the stated objectives without extensive tuning. Recently we even observe a
strengthening trend towards demergers and spin-offs, one of the most illustrious
examples being the highly acclaimed Daimler - Chrysler marriage. Should we therefore
reject this approach once and for all? This article attempts to demonstrate that doing so
would be highly detrimental and to provide a framework avoiding such negative
outcomes.
The arguments in favour
Some of the prime arguments to engage in an acquisition, are:
-
a rapid gain in size or market reach (head start)
-
immediate access to scarce resources
-
creation or reinforcement of critical mass in productive functions
-
exploitation of economies of scale in the overhead structure
-
increased visibility and account captivity
All of the above seem self-evident and compelling, nevertheless in many cases they fail
to materialise.
Further analysis
In an unconstrained environment one could distinguish the following types of mergers &
acquisitions:
-
enterprises with unrelated or only weakly related value chains. This can be dubbed
"conglomerate building" or company portfolio management and was a favoured
concept in the middle of last century.
-
horizontal integration, i.e. the acquisition of or amalgamation with direct
competitors, be it possibly with a different geographical focus
-
vertical integration, i.e. the acquisition of or amalgamation with upstream
(suppliers) or downstream (channels to market) value chain participants
-
lateral integration, a term I have coined for the acquisition of or amalgamation with
enterprises at the same level in an adjacent and complementary value chain.
Weaknesses and strengths
-
It soon became clear that, with incidental exceptions, the weaknesses of
conglomerate building by far outweighed the strengths. The first three arguments in
favour generally do not apply in this scenario, whereas economies of scale, due to
the disparity of operations, at best are small. With distinct customer bases the last
argument can be discarded as well. The only typical advantage, often cited at the
time, was in risk balancing and smoothing (if one component suffers a downturn,
some others may compensate for that by performance beyond expectation). Apart
from the fact that business cycle effects might actually increase risks, this
argument typically is too weak to justify substantial investments. Indeed,
conglomerates have essentially become a concept of the past (like dinosaurs), in
many cases have been broken up, and do not deserve our consideration for the
purpose of this analysis.
-
The prevalent model then became and still is that of horizontal integration. Here at
first sight all arguments in favour apply, but nevertheless this too has proven to be
the scene of many disappointments. I ascribe this to the fact that most of the
apparent advantages simply do not materialise, either through interpretation errors
in the decision stage, or through active obstruction during implementation. Of
course the amalgamation increases over-all size and/or reach, but this expansion is
non-accretive, i.e. presupposing reasonable deal pricing of no added shareholder
value. Whereas it is uncontested that the resource base expands, under the
assumption that both components had a reasonable business load, the availability
of scarce resources does not change substantially. The next two arguments could
hold true, but often are negated by the NIH-syndrome (not invented here): where
similar activities exist on both sides, employees tend to invest extraordinary time
and energy in proving their model's superiority and firewalling their group against
"foreign" intrusion. Where the portfolio does not change significantly, account
visibility and captivity do not grow significantly. In summary therefore, a number of
"neutrals" are complemented by one major "negative", NIH, which becomes a major
drain on productivity. It therefore is my contention that mergers and acquisitions do
not form the option of choice in response to horizontal integration requirements.
Where such requirements are real, not only perceived, organic growth appears to be
a far better approach.
-
Does this mean we should defocus mergers and acquisitions altogether? I would
strongly oppose that conclusion, but suggest we concentrate on the remaining types
(upstream, downstream and lateral) for their deployment. Under these
circumstances the favourable arguments really apply. When value chain capacity
and/or breadth increases, real accretive growth becomes feasible and is only
constrained by demand. At the same time, due to the elimination of artificial
thresholds, scarce resources can indeed be redeployed. As each productive or
overhead organisation is in a position of uniqueness, there is limited risk of NIH, on
the contrary most of them will want to evangelise their own strength or profit from
lessons learned. The immediate and significant output increase as well as the
additional portfolio breadth will tend to add to enterprise credibility, the size of
customer base and brand loyalty.
Conclusions and suggestions
In summary:
-
Conglomeration building in general has become a non goal of enterprise
development, and thus of mergers and acquisitions
-
Horizontal expansion is of limited added value, but, where justified, should be
addressed through organic growth, rather than mergers and acquisitions
-
Vertical and lateral integration are the most powerful expansion scenarios and here
amalgamation is clearly the option of choice. Especially the benefits of lateral
integration have largely been disregarded in the past, whereas this probably is the
most attractive and effective road to expansion. Where it did take place (e.g. ING,
InternatioMüller, Virgin Atlantic, Johnson & Johnson.) the results often substantially
exceeded expectations.
|
|
|
|
|
|
1. About
