File Name: acquisitions and mergers hbr .zip
These new deals are taking parent companies in uncharted directions. The good news is that companies are demonstrating new ways to manage post-merger integration—from hands-off preservation of the target to running it through a holding company—that reduces some of the risks traditionally associated with buying sprees.
- Acquisitions: The Process Can Be a Problem
- One Reason Mergers Fail: The Two Cultures Aren’t Compatible
- Stock or Cash? The Trade-Offs for Buyers and Sellers in Mergers and Acquisitions
The use of acquisitions to redirect and reshape corporate strategy has never been greater.
Executives can dramatically increase their odds of success, the authors argue, if they understand how to select targets, how much to pay for them, and whether and how to integrate them. The most common reasons for making an acquisition include holding on to a premium position or cutting costs. CEOs, who are often unrealistic about the performance boost from such acquisitions, must be sure not to pay too much for them.
Acquisitions: The Process Can Be a Problem
The financial world set a record in for mergers and acquisitions. The author has an explanation for this persistent failure and offers a way forward.
Acquirers, he notes, tend to look at acquisitions as a way of obtaining value for themselves—access to a new market or capability. The trouble is, if you spot a valuable asset or capability in a company, others will too, and the value will be lost in a bidding war.
But if you have something that will make the acquisition more competitive, the picture changes. As long as the acquired company is incapable of making that enhancement on its own or ideally with any other company, the buyer, rather than the seller, will earn the rewards. Martin describes four ways to enhance the competitiveness of a target:.
Companies tend to look at acquisitions as a way of obtaining value for themselves—access to a new market or capability, for example. But if you spot opportunity in a company, others will too, and the value will be lost in a bidding war. Look for ways to give value to the acquired company rather than take it—by being a smarter provider of capital, offering better managerial oversight, transferring a skill, or sharing a resource.
These approaches have been behind the handful of deals that have succeeded. The value of such deals eclipsed the previous record, set in , which had surpassed an earlier peak in This is perhaps not auspicious: It seems pace the late Prince that we are partying as if it were —and to boot. Why is that so? The answer is surprisingly simple: Companies that focus on what they are going to get from an acquisition are less likely to succeed than those that focus on what they have to give it.
This insight echoes one from Adam Grant, who notes in his book Give and Take that people who focus more on giving than on taking in the interpersonal realm do better, in the end, than those who focus on maximizing their own position.
That was the case in all the disasters just cited. Microsoft and Google wanted to get into smartphone hardware, HP wanted to get into enterprise search and data analytics, News Corp.
When a buyer is in take mode, the seller can elevate its price to extract all the cumulative future value from the transaction—especially if another potential buyer is in the equation.
But in addition, none of them understood their new markets, which contributed to the ultimate failure of those deals. If you have something that will render an acquired company more competitive, however, the picture changes. Creating value by being a better investor works well in countries with less-developed capital markets and is part of the great success of Indian conglomerates such as Tata Group and Mahindra Group.
Even GE has slimmed down considerably. But even in developed countries, being a better investor gives scope for creating value. In new, fast-growing industries, which experience considerable competitive uncertainty, investors that understand their domain can bring a lot of value. In the virtual reality space, for example, app developers were confident that Oculus would be a successful new platform after Facebook acquired it, in , because they were certain that Facebook would provide the requisite resources.
Another way to provide capital smartly is to facilitate the roll-up of a fragmented industry in the pursuit of scale economies. This is a favorite tool of private equity firms, which have earned billions using it. In such cases, the smarter provider of capital is usually the biggest existing player in the industry, because it brings the most scale to each acquisition until returns on scale max out.
Of course, not all fragmented industries have the potential to deliver scale or scope economies—a lesson learned the hard way by the Loewen Group Alderwoods after bankruptcy.
Loewen rolled up the funeral home business to become the biggest North American player by far, but its size alone created no meaningful competitive advantage over local or regional competitors. Often they arise through the accumulation of market power. After eliminating competitors, the big players can charge higher prices for value delivered.
For two of the biggest proposed deals of , however, the jury is still out. This, too, may be easier said than done. Supersuccessful, high-end, Europe-based Daimler-Benz thought it could bring much better general management to modestly successful, midmarket, U. As long as the U. But when that sectorwide party came crashing to a halt during the global financial crisis, GE Capital nearly brought the whole of General Electric to its knees. Berkshire Hathaway has a long track record of buying companies and boosting their performance through its management oversight, but not many other convincing corporate examples exist.
Danaher may be the best one. For the system to be successful, Danaher asserts, it must improve competitive advantage in the acquired company, not just enhance financial control and organization. And it must be followed through on, not just talked about. Despite this outstanding growth and performance, Danaher is in the process of splitting into two separate companies under the baleful eye of the activist hedge fund Third Point.
An acquirer can also materially improve the performance of an acquisition by transferring a specific—often functional—skill, asset, or capability to it directly, possibly through the redeployment of specific personnel. The skill should be critical to competitive advantage and more highly developed in the acquirer than in the acquisition.
A closer examination, however, suggests that thus far it has been a pretty expensive mistake. It was as hot as a smoking pistol and had many other potential joint venture partners.
But Disney needed Pixar: Its biggest successes in animation in the previous decade were its joint-venture projects with that company. It had little to give and lots to take—and paid an extraordinary price for the pleasure. Clearly, this method of adding value requires that the acquisition be closer to home than not. The fourth way is for the acquirer to share, rather than transfer, a capability or an asset. With some acquisitions, it also shares a powerful brand—for example, Crest for the SpinBrush and Glide dental floss.
But it had no valuable capability to share when it bought the handset business from Nokia. And even if Time Warner had limited itself to giving AOL preferential treatment, the other market players might well have retaliated by boycotting its content.
This was not like the acquisition of Oculus, in which Facebook conferred singular status on one of a number of virtual reality contenders. WhatsApp was already by far the leader in global messaging, with million users, when Facebook decided to acquire it. It is, of course, a monumentally successful company. It could have combined WhatsApp and its own application, Messenger, but it has kept them completely separate.
It seems to be based on a fact and a prayer. The prayer is that Facebook will somehow figure out how to monetize those users. That might happen, but the financial bar is staggeringly high.
To earn Facebook shareholders a return on the cost of the acquisition, WhatsApp would have to become one of the most profitable software companies on the planet in less than a decade.
First, with the rise in stock-based compensation since the s, the value of a successful acquisition bet is greatly enhanced for the CEO. Furthermore, compensation packages are strongly correlated with the size of the company, and an acquisition makes it bigger. Even failed acquisitions can be personally profitable. The second bias at least in the United States comes from an unlikely source: the Financial Accounting Standards Board.
Before the dot-com bubble burst, in , intangible assets were written off over a year period. With these two drivers providing the liquid lubrication—and the global financial crisis apparently a distant memory—the party is in full swing. That would be the good news. That is a gigantic investment. But history shows that when things turn sour for the base business—think of Nortel, Bank of America, WorldCom, Tyco—shareholders start looking more closely at acquisitions and asking, What were they thinking?
And what the acquirer puts into the deal determines the value that comes out of it. You have 1 free article s left this month. You are reading your last free article for this month. Subscribe for unlimited access. Create an account to read 2 more. Stuart Bradford. Martin describes four ways to enhance the competitiveness of a target: Be a smarter provider of growth capital.
Provide better managerial oversight. Transfer valuable skills to the acquisition. Share valuable capabilities with the acquisition. Why It Happens Companies tend to look at acquisitions as a way of obtaining value for themselves—access to a new market or capability, for example. The Solution Look for ways to give value to the acquired company rather than take it—by being a smarter provider of capital, offering better managerial oversight, transferring a skill, or sharing a resource.
The rush toward huge cross-border mergers is based on a faulty understanding of economics. There are better ways to address globalization than relentless expansion. A version of this article appeared in the June issue pp. Roger L. Partner Center.
One Reason Mergers Fail: The Two Cultures Aren’t Compatible
The deal would allow Amazon to grow beyond e-commerce and collect significant shopper data, while Whole Foods could lower its prices and scale up after its recent declines in sales. When tight and loose cultures merge, there is a good chance that they will clash — but, if diagnosed early, these clashes can be handled productively. To avoid the pitfalls experienced by Amazon and Whole Foods, companies considering merging should: 1 Prepare to negotiate culture from the start and identify areas for compromise. The deal would allow Amazon to grow beyond e-commerce and sell groceries in hundreds of stores while collecting significant shopper data. A year later, such optimism seems hard to find at Whole Foods. Scorecards measuring compliance with a new inventory system are used to punish and sometimes terminate workers.
The financial world set a record in for mergers and acquisitions. The value of such deals eclipsed the previous record, set in , which had surpassed an.
Stock or Cash? The Trade-Offs for Buyers and Sellers in Mergers and Acquisitions
Follow this topic. See All Topics. The huge sums that private equity firms make on their investments evoke admiration and envy. Typically, these returns are attributed to the firms' aggressive
It turns out that this is more of a problem for companies that are acquiring complementary businesses that they know quite well. Your customers need to have a reason to like the new combination, which may require change as well as integration. According to most studies , between 70 and 90 percent of acquisitions fail. Most explanations for this depressing number emphasize problems with integrating the two parties involved.
Below are the available bulk discount rates for each individual item when you purchase a certain amount. Publication Date: November 01, The shift has profound ramifications for shareholders of both the acquiring and acquired companies. In this article, the authors provide a framework and two simple tools to guide boards of both companies through the issues they need to consider when making decisions about how to pay for--and whether to accept--a deal.
Getting this type of reorganization right allows business units from the merging companies to be brought together smoothly, corporate activities to be standardized and streamlined, people to be aligned behind desired outcomes, and integration synergies to be delivered quickly. Common pitfalls are a lack of cultural understanding between the integrating parties, poor integration leadership, and a focus on the wrong activity set or the wrong targets.
Значит, это не Дэвид. Сьюзан почувствовала, что у нее перехватило дыхание. Она лишь хотела знать, что человек, которого она любит, в безопасности. Стратмор, в свою очередь, тоже сгорал от нетерпения, но подругой причине. Если Дэвид и дальше задержится, придется послать ему на помощь кого-то из полевых агентов АНБ, а это было связано с риском, которого коммандер всеми силами хотел избежать. - Коммандер, - сказал Чатрукьян, - я уверен, что нам надо проверить… - Подождите минутку, - сказал Стратмор в трубку, извинившись перед собеседником. Он прикрыл микрофон телефона рукой и гневно посмотрел на своего молодого сотрудника.
Но этот канадец не знал, что ему надо держаться изо всех сил, поэтому они и трех метров не проехали, как он грохнулся об асфальт, разбил себе голову и сломал запястье. - Что? - Сьюзан не верила своим ушам. - Офицер хотел доставить его в госпиталь, но канадец был вне себя от ярости, сказав, что скорее пойдет в Канаду пешком, чем еще раз сядет на мотоцикл. Все, что полицейский мог сделать, - это проводить его до маленькой муниципальной клиники неподалеку от парка. Там он его и оставил. - Думаю, нет нужды спрашивать, куда направился Дэвид, - хмуро сказала. ГЛАВА 17 Дэвид Беккер ступил на раскаленные плиты площади Испании.
Его редеющие седые волосы спутались, и даже несмотря на прохладу, создаваемую мощным кондиционером, на лбу у него выступили капельки пота. Его костюм выглядел так, будто он в нем спал. Стратмор сидел за современным письменным столом с двумя клавиатурами и монитором в расположенной сбоку нише. Стол был завален компьютерными распечатками и выглядел каким-то чужеродным в этом задернутом шторами помещении. - Тяжелая неделя? - спросила .
Верно, Шерлок Холмс. - Забавное имя. Сам придумал. - А кто же еще! - ответил тот с гордостью. - Хочу его запатентовать.
При этом дерево иногда приходится потрясти, чтобы собрать подгнившие плоды. И я уверена, что большинство наших граждан готовы поступиться некоторыми правами, но знать, что негодяи не разгуливают на свободе. Хейл промолчал.
Когда люк открылся, Чатрукьян невольно отпрянул. Струя горячего воздуха, напоенного фреоном, ударила ему прямо в лицо. Клубы пара вырвались наружу, подкрашенные снизу в красный цвет контрольными лампами. Далекий гул генераторов теперь превратился в громкое урчание.
Скажи, что ты ушел с поста декана. Дэвид кивнул.