Monday 12th June 2006
Going for broke
Acquisitions that fail to meet expectations and deliver value can easily topple previously stable businesses. So what typically turns a potential success story into another sorry statistic? GrowthBusiness finds out.From international corporations down to mid-market minnows, every man and his dog seems to be jumping on the acquisition bandwagon these days. It’s easy to see why. Tagging extra commercial concerns onto a thriving venture is the quickest way to expand, giving immediate commercial and tactical benefits from economies of scale, beefed-up turnover, fast routes into a fresh market and access to new customers. Buying a fully functioning business is always more attractive to thrill-seeking entrepreneurs than relying on organic growth alone, which can be slow and uninspiring. A buy-and-build strategy can be immediately lucrative too, generating bonuses for management and staff in both the acquired and acquiring company – and, of course, for investors. Last year, according to the Office of National Statistics, the value of the mergers and acquisitions (M&A) market in the UK almost doubled, reaching an estimated £133 billion. Private equity continues to be the one of the key drivers in corporate transactions, accounting for around 30 per cent of all UK M&A deals between 1999 and 2005, according to the British Venture Capital Association. The return of swathes of strategic trade buyers into the fray has added momentum, further strengthening the UK’s position as the most active single regional market for M&A in Europe. For corporations with healthy balance sheets, cash to spend, maximised organic growth, enhancing value through acquisitions is the next logical step. So, why is it that, with such a thriving sector and many positive benefits to acquisitions, so many crash and burn? Depending on which market reports you read, between 70 and 90 per cent of all acquisitions either fail completely or fail to meet shareholder expectations. And it’s not just small, inexperienced or under-funded firms making M&A mistakes. As Time Warner’s short-lived, loss-making AOL acquisition proved, even the big boys get it wrong. ‘If an acquisition doesn’t deliver, it’s either for strategic reasons or because of poor execution,’ believes Richard Green, joint managing director of August Equity (formerly Kleinwort Capital), which provides mid-market private equity investments for media, technology, healthcare and specialist manufacturing firms. ‘By execution I’m not just referring to the integration of the bought business into the acquiring company, I also mean negotiation of the purchasing deal in the first place.’ ‘Most of the mistakes made during acquisitions are so basic, it’s amazing,’ says Pip Peel from project management consultancy PIPC, who is an expert in the M&A field. ‘The first and most obvious error is buying the wrong business.’ Blunders in this area generally fall into two camps: misdirected strategy or poor targeting. Flawed strategy
Before identifying a prospective target, the management of an acquiring business should define the strategic goals of the acquisition. Typical motivations for a strategic corporate buyer include increasing market share, diversifying product or service, accessing new customers or integrating vertically, such as by purchasing a supplier or distributor. However, Green contends that ‘private equity houses are primarily motivated by a desire to make a good return on their investment. ‘Of course, both types of acquirers are influenced by the nature of the companies involved and the marketplace.’ Failing to pin down considered and realistic reasoning for buying a business makes it much harder to identify a suitable target, which is when rushed and ill-advised decisions can be easily made. As Green elaborates, ‘Purchasing an incompatible business is often a decision based on flawed business logic.’ For example, buying your competitor isn’t necessarily a wise idea – many well-known brands have bitten off more than they can chew through such a bold move, including dealing with repercussions relating to anti-competition laws. And, contrary to received wisdom, companies experiencing difficulties with market conditions aren’t usually bailed out by acquisitions. Take Compaq and Digital Equipment Corporation, for example. Faced with increasing competition in their core IT markets, Compaq’s acquisition of Digital seemed like an ideal solution but the combined business failed to meet expectations and struggled to overcome existing commercial pressures. Digital had to sell off most of its assets and Compaq eventually succumbed to a takeover by long-term rival Hewlett-Packard.
Sally Giles
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