level of debt and the falling value of the US dollar there is
little doubt that the U.S. will experience high levels of inflation in the coming years.
Inflation in the 70s was much more volatile than in the
new millennium but if we look at the trend line of the two
eras they appear to coincide fairly well. So even though we
have not seen the volatility of the 70s, so far anyway, we are
certainly traveling in the same direction. If this trend continues we could see double-digit inflation five years from
now and with a little volatility thrown in we could see it
much sooner. A lot depends on Washington reigning in their
unprecedented spending.
What history tells us is that companies are more or less
inclined to pursue an M&A strategy depending on the state
of the economy, energy supply, monetary supply, inflation,
interest rates, and government actions/inactions. All of
these issues have a direct impact on the acquisition market
and the eventual success of any acquisition that is made.
Considering this jungle of unsavory happenings that companies have to contend with, why do businesses pursue an
M&A strategy?
The answer to this question is quite simple. Most businesses believe that acquisitions offer them a better chance
for real growth than continuing to try to do that organically by investing in classical in-house R&D activities. Based
on a number of independent investigations into this matter
the bottom line appears to indicate that the level of suc-cess/failure for either internal R&D or external acquisitions is about the same. The primary difference appears to
be that in an R&D approach, if you fail you have only
expense receipts to show for the effort while in the acquisition case you would at least end up with assets of some
questionable value. The problem with comparing these two
options is that it’s truly “apples and oranges.” What it takes
to be successful in your R&D programs differs greatly from
what it takes to make an acquisition successful.
Although there is some disagreement between experts,
somewhere between two-thirds and three-fourths of most
acquisitions tend to destroy intrinsic value within the first
year (see Figure 4).
In truth, few acquisitions truly fail in the strictest sense
of the word. However, the large majority do fail to meet the
buyer’s projections or expectations, at least in the time
frame originally projected. On average, it takes between
two and four years before it is possible to truly determine if
an acquisition is working, delivering the value and meeting
critical objectives as originally planned. Those acquisitions
not meeting their goals by the start of the fourth year are
usually spun off by the buyer at a loss of value and overall
core competency as compared with the original purchase.
Although a lot of external issues do impinge on the number of acquisitions that may be taking place at any given
time most acquisitions that fail do so more as a result of
internal problems. So, why do acquisitions fail to meet
expectations?
Somewhat similar to other questions of this nature, there
is no single reason for failure or success. In fact, when it
Figure 4
comes to acquisition failures there seems to be an endless
list of possible causes. In order to reduce this huge list
somewhat we have prepared a listing (see Table 1) that provides ranking, based on my colleagues and my experience,
of the ten most common reasons acquisitions fail to meet
expectations. The listing is not to be considered an exhaustive inventory of failure causes but rather the more common yet avoidable negative outcomes.
While the first item in the list flows from unsound
assumptions in financial analyses, the rest are often attributable to faulty processes, have significant organizational
aspects and/or reflect vulnerabilities related to key stakeholders and are largely avoidable through better upfront
planning. The good news here is that with proper discipline, focus and attention to details, many of these problems and areas of vulnerability can be addressed, minimized or avoided altogether.
In shepherding both buyers and sellers through the
acquisition process, my colleagues and I have witnessed the
same issues—many of them people related—time and
Table 1: Causes of acquisition failure
1. Buyer paid too much for the acquisition.
2. Acquisition is not compatible with the buyer’s
core business.
3. Lack of an integration plan.
4. Integrated too quickly.
5. Integrated too slowly.
6. Kept separate too long.
7. Loss of key core competencies with
departing employees.
8. Loss of key customers.
9. Loss of key alliance partners.
10. Too many “negative surprises.”
