It has been estimated that 60% of all acquisitions fail to produce a return on investment.. Other estimates go as high as 80%. So it is surely worth considering just why acquisitions go wrong. This article explores some of the reasons acquisitions go wrong.
Acquiring the Wrong Target at the Wrong Time in the Wrong Deal
Markets often put a significant premium on “growth” companies. This can put either real or imagined pressure on management to grow – either through organic growth or by acquisitions. Especially in periods when there is competition for acquisitions, this can easily lead management to accept less than ideal targets – and to pursue them even in periods in which the acquirer may not have the resources – capital or human to execute well. Companies may pursue targets for which the potential synergies may be only imagined and the complexity of integration minimized.
Similarly, the acquirer may pay the wrong price in a transaction structure that does not fit the underlying facts of the acquisition transaction. In some cases, this is caused by using a “standard” transaction structure without adequately tailoring it to the specifics of the transaction.
Due Diligence Issues
Due diligence is the rather broad subject of gathering information about a target company sufficient to make a decision to move forward with an acquisition. It encompasses legal due diligence, financial due diligence, operational due diligence and may include specialized due diligence, such as environmental due diligence.
The two key mistakes in the due diligence process are failing to uncover relevant information and failing to act on relevant information that is developed during the due diligence process.
All too often, due diligence processes do identify problems or issues in connection with acquisitions, but management, in their haste to complete the acquisition either elects not to act on the due diligence findings or fails to focus on its implications.
It is not uncommon for acquirors to minimize the effort needed to complete the integration of a new acquisition. There are many reasons for this. Some companies may have devoted too much of their available capital to the direct cost of the acquisition and feel stretched by such costs as systems integration costs and elect to defer such processes to future periods. Others may fail to realize other aspects of integration that may have a huge impact on the combined organizations ability to retain its key customers, employees and suppliers.
In some cases, acquirors actually promise the sellers of acquisitions on the idea that they will make few changes in the way the business is operated, perhaps out of a desire to protect key employees during the transition.
One encouraging observation is that it seems that companies that do a lot of acquisitions are most likely to be successful – they have well-honed and disciplined strategies and procedures and do not deviate from them.
The common denominator among the reasons that acquisitions go wrong is that management has failed to adequately consider and address all of the implications of the acquisition to the combined entity. Of course, even a carefully planned and executed acquisition can fail to achieve the anticipated results for reasons beyond the control of management. But sticking to a disciplined acquisition process should greatly improve the odds for a successful transaction.