Mergers and acquisitions are an integral part of the global strategic and financial business landscape, whether one is part of the acquiring company, the target, a competitor, an advisor (including investment bankers, accountants, lawyers, and many others), an investor, a regulator, or someone living or working in the neighboring community.
Although fluctuating widely from periods of peaks and troughs of merger activity, the baseline size and growth of mergers is clear. In fact, the “slow” period of activity in 2002 was well in excess of the “peak” of activity in the late 1980s. Even the downturn following the financial crisis of 2007 and 2008 saw levels of M&A activity remaining well above $2 trillion annually for at least six years, which isn't much of a downturn when compared to levels only a dozen years earlier. At the time of writing, it is unclear whether M&A deal volume will increase or not from that level but, whether up or down, the absolute number of deals will certainly remain high.
Yet despite this impressive level of activity, mergers and acquisitions are often misunderstood and misrepresented in the press and by those who are engaged in each transaction. Deals, especially when hostile, cross-border, or among large companies, might be front-page news (and interestingly there are some days when every story covered on the first page of the Financial Times is about an acquisition), yet there is a great deal of conflicting evidence as to whether they are successful or not. This can sometimes be a function of senior management focus: for example, when we have observed boards during M&A deals, they often appear to spend more time discussing the new corporate name or the color and design of the new corporate logo than the key decisions regarding senior management positions or culture. Fortunately, our own research has shown improved performance from companies that make acquisitions, especially since the merger wave that began in 2003, so perhaps the focus on key integration decisions is changing.
Why do the public and many managers still believe that most deals fail? Partly, this is due to the propensity of journalists to write about the less successful deals. These make for great stories in the financial and popular press. Together with the (outdated) conventional wisdom that most deals fail, this creates a negative bias for the financial community that can result in a form of groupthink whereby investment managers and other equity analysts, as well as individual investors, are more likely to ignore positive information and mimic each other's negative investment decisions. This herd behavior has certainly resulted in many M&A deals not being accurately assessed on their own merits. In M&A, bad news appears to be a more popular subject with readers, who are more interested in value-destroying deals, than those executed smoothly, successfully, and often quietly.
That said, there do seem to be some inviolate truths about M&A deals:
- Many fail to deliver the promised gains to shareholders.
- Boards, CEOs, senior managers, and advisors pursue deals for personal reasons.
- Success with one deal doesn't guarantee success in the next deal.
- Deals have a momentum of their own and this means that they don't get dropped when they no longer make sense.
- The deal doesn't end when the money changes hands; in fact, that point marks the start of the most difficult stage of a deal, the tough integration process that few get right.
Indeed, given the conventional wisdom that most deals fail, it must be that boards and chief executives either treat that conventional wisdom as applying to someone else or as hyperbole perpetuated by consultants and other advisors as justification for their services. Or it may be a matter of corporate “hubris” that refuses to see what is obvious and plan accordingly.
Some M&A failures have been dramatic. The AOL/Time Warner deal lost 93% of its value during the integration period as the internet service provider merged with the publishing company in an attempt to combine content with delivery. VeriSign, another internet-related services company, lost $17 billion of its $20 billion acquisition of Network Solutions in 2000, and its stock fell 98%. Failures are not unique to the United States. The Royal Bank of Scotland, together with Banco Santander and Fortis, purchased ABN AMRO in 2007; that deal contributed to the failure of Fortis and the semi-nationalization of RBS. It was pursued despite the signals in the marketplace which led to the financial crisis. Another classic example of failure – and one where the very basic elements of business intelligence were ignored – is Quaker Oats, a food and beverage company founded in 1901. In the brief case study that follows, look at the first word of the penultimate paragraph. It is the key identifier of an intelligence failure. The word is “following.” Incompatibility of cultures is one of the biggest post-acquisition killers.
Quaker Oats
On November 1, 1994, Quaker Oats acquired Snapple for approximately $1.9 billion, becoming the third largest producer of soft drinks in the United States.
The Quaker Oats Company had been founded at the start of the 20th century, and its most famous product, Quaker Oats Cereal, originated in 1877. At the time of the initial acquisition, Quaker Oats was one of the leading manufacturers of cereal products in the United States, but it had also diversified into baby food, animal feed, chocolate (in Mexico), and honey (in the Netherlands). One of its most successful recent diversifications had been the acquisition in 1983 of Gatorade, a sports drink company. Under Quaker Oats' ownership, Gatorade had grown tremendously. This success contributed to the feeling within Quaker Oats that, because its main business was mature, it should focus on “investment in brands with high growth potential and divestment of lower growth, lower-margin businesses,” as stated in its 1995 Annual Report.
Snapple was a trendy, slightly eccentric company, founded in 1972 by three entrepreneurs (two window washers and the owner of a health food store). Under the brand name “Snapple” (acquired in 1978), their product line had grown by word of mouth to become one of the best-selling fruit drinks lines in the northeast United States. They also sold iced tea drinks, which had been added in 1987.
Where Quaker Oats was an old-line national company, Snapple was a “New Age” company run as a regional family business. However, as such, Snapple did not have the resources to continue to expand, and with increased new competition from the largest soft drink manufacturers (Coca-Cola and Pepsi), they looked for someone to acquire them.
Quaker Oats thought that there were important potential synergies between Gatorade and Snapple. On the surface, it appeared that they could share distribution channels (reducing costs) and they had complementary geographic areas. Quaker Oats also hoped that its conservative culture could be invigorated by Gatorade.
Following the acquisition, it was determined that the pricing strategy was different for the two product lines, the distribution different (Gatorade used a warehouse distribution system whereas Snapple used a single-serve, refrigerated delivery system) and, most importantly, the cultures were not compatible (affecting integration, advertising, and many other areas where coordination was required). In addition, in the quarter just prior to the acquisition, Snapple had experienced a 74% drop in sales on a year-over-year basis, a fact that was only told to Quaker Oats a few days before the deal was finalized. At the same time as sales volumes were decreasing, the cost of integration and national rollout under Quaker Oats was rising.
Less than three years later, in 1997, Quaker Oats sold off its Snapple division to Triarc Corporation for $300 million.
In perhaps one of the more ironic stories of acquisition failure, in late 2013, G4S, a UK-based company which bills itself as the “world's leading international security solutions group,” blamed “a short-term and over-aggressive acquisition strategy for a string of scandals,” according to the Financial Times. The new CEO announced that the company was considering disposing of 35 underperforming business, some of which had only been recently acquired. Brilliant that a security company that conducts due diligence and other intelligence-related functions for its clients has effectively admitted that it was no good at its own intel!
One challenge in trying to determine the success of an acquisition lies in how to define “success.” Is it shareholder value? If so, over what period? Or should one look at sales growth? The ability to retain key customers and market share? Employee retention? Cost savings? And how would the company or companies have performed if they had not merged? Perhaps, as some have suggested, success should be defined by the publicized goals of the merging companies themselves and then measured against the achievement of those stated objectives.
No matter how it's measured, a fair degree of consistency has emerged in the results of studies that examined M&A “success” through the 20th century. Essentially, all of the studies found that well over half of all mergers and acquisitions should never have taken place because they did not succeed by whatever definition of success used. Although many studies based on deals conducted in the 1980s and 1990s found that only 30 to 40% were successful, more recent studies have found that this success rate is improving, yet still only to around the 50% level. Yet most companies that have grown into global giants used M&A as part of their growth strategy and without those acquisitions and mergers would not be the size that they are today.
This paradox raises the following questions:
- Can a company become a large global player without having made acquisitions?
- Is organic growth sufficient to become a leading global or even a leading national player?
The challenge for management is to reconcile the relatively low odds of deal success with the need to incorporate acquisitions or mergers into their growth strategy, or to figure out how to beat the odds and be successful in takeovers. This is where business intelligence techniques are essential.
Prior experience may not be a predictor of success, although some studies have shown that acquirers do better when making an acquisition that is similar to deals they have done previously and that serial acquirers – those that do two or more significant deals a year – also have a better success rate than firms that are less frequent acquirers of other companies. Indeed, these serial acquirers have a great impact on the M&A market. Accenture, in their 2010 study of serial acquirers, found that, although serial acquirers represented only 9% of all acquiring companies, they conducted 35% of all the deals as measured by number of deals and 44% of the deal volume measured by size of deal. We will provide many examples in this book of these serial acquirers, given their importance to the market. It does appear to be true that acquirers who are active, frequent buyers and who are willing to do complex and big deals outperform those who are inactive and conservative. This does imply that a set of best practices exist, as we will discuss in this book. Maybe practice really does make perfect, or at least better.
Here again the utilization of specific intelligence is central. Many studies have shown that relatively inexperienced acquirers might inappropriately apply generalized acquisition experience to dissimilar acquisitions. The more sophisticated acquirers would appropriately differentiate between their acquisitions. In a deal that will be discussed later, VeriSign appears to have failed with its 2004 purchase of Jamba AG despite having made 17 other acquisitions in the prior six years, many in related internet businesses. Intelligence cannot, therefore, be taken for granted.
