The Hindu Business Line : Lest ambitious matches turn into dismal ashes

Not all marriages succeed. Nor do all mergers and acquisitions (M&A). A good number end up in smoke. Scratching through the ashes at the pyres of failed matches, Robert F. Bruner presents his findings in, Deals from Hell, from Wiley (www.wiley.com).

"Bad deals have led to some titanic failures for shareholders," writes Arthur Levitt, Jr. in his Foreword. He emphasises the need for `greater care and thinking' when the deals are on the launch pad.

Why M&A fails

"Failure pervades business, and most firms fail eventually," notes the intro, sombrely. "Studying M&A failure offers titillating entertainment, worthy of Cosmopolitan, the National Enquirer, or Geraldo. However, it is also a springboard to business insight."

The book is divided into three parts, beginning with `the foundations of M&A failure'. Bruner surveys research on `where M&A pays and where it strays' and concludes that M&A is more likely to fail when the organisation `enters a fundamentally unprofitable industry, or refuses to exit from one'. He advises CEOs to be equipped with `a sensitive humbug-detector' because "some of the M&A programmes that are cloaked in the language of strategic profitability often harbour serious logical traps such as momentum".

Failure is also likely when the organisation "steps far away from what it knows". Because "focus and relatedness pay better than unrelated diversification". A third reason is that the economic benefits of the deal `are improbable or not incremental to the deal'. For instance, "revenue-enhancement synergies from cross-selling are notoriously hard to capture, and research shows that they are discounted rather heavily by investors." Fourthly, the buyer may fail in getting economic advantage, when bargaining power resides with the target. Bruner cites as example foreign acquisitions "where, because of entry barriers, knowledge of local markets and customs, and market power, the buyer will likely pay a premium."

Fifthly, not being creative in designing the deal can spell doom. "The use of cash, debt financing, tax shields, staged payments, merger-of-equal terms, and earnout incentive structures are all associated with higher buyer returns." And sixthly, lack of checks, balances and incentives contributes to failure. "Throughout the organisation, from operating managers to the front line of deal-doers, your people must think like investors." Else, they don't have some `skin in the game'!

An interesting chart summarises the author's analysis of 2,805 transactions, and plots cumulative adjusted returns, from day - 5 to day +756. The rule of thumb that Bruner concurs with is this: "The first 100 days after consummation are the crucial window of opportunity within which success or failure is determined."

For the whole sample, the mean adjusted return is - 0.51 per cent to buyers' shareholders over 11 days, and +11.72 per cent over 3 years. "For the best deals, the returns climb sharply for the 310 days after announcement, and then the rate of gain slows. For the worst deals, the rate of decline after day 75 is unerring: no breathers; no slowing of the deterioration; no hints at a turnaround."

What makes for chillier reading is a chapter on the parallels between real disasters and M&A failures. "Deals from hell are sufficiently similar to real disasters to invite knowledge transfer about the latter to an understanding of the former. Moreover these lessons fill a glaring gap in our understanding about M&A failure: How it happens," reasons Bruner, before turning the pages of history to look at catastrophes such as Bhopal gas tragedy and Chernobyl explosion.

Six key elements

According to the author, six key elements embedded in disasters are "complexity, tight coupling, management choices, cognitive biases, business not as usual, and failure of the operational team." In unison, these are lethal, he cautions. "Systems that adapt well to error anticipate it, actively seek information, use checkpoints to control the spread of error, and invite countervailing forces to oppose error." So, what's the insight for businesses? "Design of organisation structures and business processes could employ similar principles to thwart M&A failures," counsels Bruner.

Part II of the book has ten case studies, including AOL-Time Warner, Mattel-The Learning Company, and Renault-Volvo.

Part III is about `conclusions and implications'. Bruner dins in before parting: "The growth that matters is growth in economic value. The rest is smoke." Fiery read!

BookValue@TheHindu.co.in