Some Sobering Thoughts: Basic Rules For Successful Acquisitions
The roadside is littered with disasters when the only contribution an acquiring company brings is money.
Successful acquisitions occur when the acquiring company contributes management, technology, strength of distribution, and the like.
As Peter F. Drucker observed, executives who ignore basic, hard-learned rules of successful acquisitions inevitably come to grief.
In this article, Jim Champy provides a much-needed reminder of the core business principles to which executives involved in acquisitions should bind their ambitions.
When one company buys another, it’s usually with the expectation that the combination of the two will be worth more—or at least not less—than the sum of the parts.
This is usually described as synergy (2+2=5). But it doesn’t always work out that way.
An alarm went off when I read about Microsoft’s proposed acquisition of LinkedIn. Any deal priced that high (in this case, it’s $26.2 billion) should bring concern, especially given Microsoft’s past experience with acquisitions.
Shortly after the tech giant bought Nokia, it wrote off most of the $9.4 billion acquisition.
The business press claimed Microsoft had entered an unfamiliar field, and in the final analysis had little to contribute with respect to management, core technology, distribution strength, and the like.
Microsoft justified the LinkedIn deal on the basis of “the coming together of the professional cloud and the professional network.”
The idea seems somewhat abstract to me. But Microsoft has a lot of smart people who should know what they are doing.
I’m sure Microsoft’s executives believe synergies between the two companies will create value, or that LinkedIn’s data on its millions users is worth a lot. But keeping $26 billion worth of value and building on that is no easy job.
As is often the case with such expensive acquisitions, the principal problem may be the extreme pressure on management to produce a satisfactory return on what many deem an inflated cost of investment.
Big Deals Have Big Risks
I’m a cautious buyer when it comes to acquiring another company. The well-researched history of acquisitions has shown that deals usually don’t deliver the expected value.
To repeat: Sometimes the acquirer just pays too much, or it’s the wrong company to buy—like HP’s $11.1 billion acquisition of Autonomy that resulted in a $9 billion write off. But often, the acquisition is just mismanaged.
Look Before You Leap: The Five Basic Rules for Acquiring Companies
Growth by acquisition can be a legitimate strategy. Integrating and leveraging another company’s assets must be carefully managed.
When I was an executive at Computer Sciences Corporation (CSC), we acquired many high-quality technology companies. It was an explicit growth strategy.
We left the executives of the acquired company alone, to run the company as they saw fit. They knew their business better than we did. We expected them to perform as promised.
They generally did, and we grew CSC dramatically and successfully. The strategy worked. But because we left the acquired companies alone, we did not get much synergy across business units. I’ll comment more on synergy in a moment.
Given the current surge in the selling and buying of technology companies, I’m compelled to render some advice—either to help acquisitions work or avert those that shouldn’t be made.
I’m not directing this advice specifically to Microsoft. That would be presumptuous. It’s advice for anyone with an appetite to buy.
1. Never value a deal based on top-line synergies
The word “synergy” is often used to justify an acquisition, but synergies don’t materialize easily. Those that do usually come from cost reductions.
When you buy a company, there are always duplicative costs that can be eliminated. You don’t need two of every business function. It’s a painful exercise, but cost savings can be achieved.
When consolidating business functions, don’t always assume that yours—the buyer’s—are better.
Sometimes an acquired company does something better than you. Those are the people and processes you want to keep.
The more difficult synergies to achieve are those that increase the top line of combined companies. These synergies require new value to be created—and value creation is not easy to do.
When you run the financials to determine how to price a deal, just assume the current projected revenues of the acquired company and no more. If you get more, it will be a bonus.
2. Look carefully and understand as much as you can before you buy
In the excitement to acquire a company, it’s easy to overlook the challenges. Get to know as much as you can about a company and its people before a deal is consummated.
Remember that a seller will know more about what’s being sold than you will ever know. Most sellers will be honest. But what they see as normal may not be your idea of normalcy.
I expect the due diligence process in the HP/Autonomy deal was lacking. It’s been up to the courts to decide who has been wronged.
HP has sued the seller for misrepresenting the asset. The seller is suing HP for defamation of character. This is litigation you want to avoid.
3. Don’t touch the new asset until you know what you have bought
Go slow in changing what you buy. Take some time to understand the subtleties of how the company operates.
I learned this the hard way in a small acquisition I did while at CSC. We had bought a small, publicly traded, consulting and research services firm in the UK. Security regulations in the UK prevented me from going inside the company to really understand how it worked, until we had made an offer to buy.
After we closed the deal, I moved quickly to integrate the firm’s research activities with those of CSC—violating CSC’s custom of not touching the acquired company.
The work and management style of the two companies turned out to be dramatically different. We almost lost the whole asset. I’m not sure integration would have ever been possible.
I learned not to apply your company’s standard processes and policies too quickly. Even a move to standardize benefits and compensation can create great upset and the loss of key people.
4. Be nice to your new sisters and brothers
The success of an acquisition only doesn’t depend on the actions of executives. How everyone treats newly acquired employees can make a big difference. Play nice.
I once asked the then CEO of Viacom how he was going to get synergies between the several entertainment companies he had just bought. He told me he never bought a company based on expected synergies.
But he did get synergies between companies when people in those companies liked each other and took the initiative to work together. It’s a simple idea, but being nice across company lines can make a difference.
I have also seen the harm created by the opposite behavior: “We own your company now, so we can do what we damn well please.” Arrogance will destroy the value of any combination.
5. Be sensitive to different cultures
How many times does a major league sports team buy a star athlete for millions to find that the star does not perform. “The chemistry just didn’t work” is the common refrain.
When the cultures of two companies are vastly different, managing a combination can also be challenging (e.g., large pharmaceutical companies acquiring cosmetic firms).
You could manage a very different culture by keeping the acquired company separate. But if integration or the standardization of customer facing processes are required, remember that cultural change will take care and time.
The Good News: Acquisitions Can Create Customer-Getting/Customer-Keeping Value
Don’t be discouraged by this advice. Today, many large consumer food companies—Danone, General Mills, Tyson—are acquiring companies focused on organic and non-GMO products, the fastest growing segment of the industry.
Said Peter F. Drucker:
Successful acquisitions usually require a common core of unity…
The two businesses must have in common either markets or technology, though occasionally a comparable production process has also provided sufficient unity of experience and expertise, as well as a common language to bring companies together…
Without such a core of unity… acquisition never works; financial ties alone are insufficient.
Growth through acquisition is a legitimate strategy that’s working for many organizations. Success for these companies has come from a combination of honestly assessing their acquisition prospects and careful execution.
As Drucker reminded us again and again: "History amply teaches that investors and executives, in both the acquiring and acquired company, and the bankers who finance them soon come to grief if they do judge an acquisition financially instead of by business principles."