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Acquisition: Why Some Mergers Fail and Others Succeed

Acquisition can be the fastest and most effective way for a company to gain new customers and boost productivity and profits.

Most companies will never succeed on organic growth alone.  Almost every large company in the world has been built on at least one, if not more, acquisitions and mergers.

Depending on the level of risk and size of the deal it’s not unusual for a large company to earn a 10 percent return on investment within three years of an acquisition.

Yet, 70 percent to 90 percent of all acquisitions are failures, according to a 2016 article in the Harvard Business Review, “M&A: The One Thing You Need to Get Right.”

There are many reasons why some mergers fail and others succeed.

One of the greatest hurdles to successful acquisition is integration or blending the two companies that may or may not have similar cultures.  The process is slow and requires a good mesh in management approaches and constant communication to avoid conflicts from differences in corporate governance.

From a buyers’ perspective, it’s easy to overestimate the target’s opportunities for synergy and economy of scale and underestimate the long-term investment needed to achieve a solid ROI.

Even the savviest buyer may struggle to accurately estimate the target company’s revenue potential.  Accessing information about the firm’s managers, suppliers, channel partners and customers can be even trickier.

Success also depends on the buyer’s motives, according to a 2016 article in the Harvard Business Review, “M&A: the One Thing You Need to Get Right.”

“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,” the article said.

Companies that operate in “take mode” often pay top dollar for the acquisition, the article said, stripping out the reward of future value.  In addition, those companies often fail to consider whether the resources they can offer the target, such as better managerial oversight and sharing valuable capabilities, will truly make it more competitive.

Experts offer these suggestions to help the acquiring company beat the odds:

  • Develop a defined process.  Pitney Bowes created a due diligence checklist covering nearly 100 points of concern.  While that may be over the top for some companies, it’s important to come up with a set of basic rules or principals.
  • Pursue firms that offer synergies or complementary services that make sense for the buyer’s current business mix.  This way the buyer can provide economies of scale, cross-sell products and services and offer powerful marketing and distribution capabilities.
  • Make multiple smaller acquisitions.  A Bain & Company study showed that the greatest economic returns came from acquisitions that represented 5 percent or less of the acquirer’s market capitalization.
  • Look for firms with similar organizational attributes and brand values to ease integration.
  • Appoint an integration manager to oversee the acquisition’s business plan and take responsibility for making it a success.  The manager must develop strong working relationships with the new management teams to smooth their entry into the new culture and business operations.
  • Set a standard to measure success.  How should the acquisition be judged in terms of growth potential, market leadership and management teams?  Should financial objectives be calculated by operating margins, income and cash generation potential or other profitability ratios.

Acquisition provides one of the best ways to grow a business.  But the process requires diligence and sound judgement.  For an acquisition to succeed, the buyer must find a complimentary target that won’t overextend its resources, understand that the investment extends well beyond the purchase price and fully commit to the challenging, long-term process of merging two businesses.