The Hindu Business Line : Making acquisitions work

Acquisition strategy: Prior to the merger with Arcelor, L. N. Mittal bought a series of ailing steel companies at bargain basement prices, ran them efficiently and integrated them for their operating synergies.

A. V. Ram Mohan

Acquisitions are where management theory is seriously in conflict with management practice.

A number of research articles have shown that more than 75 per cent of acquisitions have failed to achieve their objectives, yet acquisition as a strategic manoeuvre is as popular as ever. When a public company gleefully announces a forthcoming acqui sition, its share price drops substantially, indicating that investors have a better understanding of the acquiring game.

Why do acquisitions fail? Typically there are two reasons: One, the price paid by the acquiring company is far higher than justified by the business fundamentals of the acquired company. Two, after the deal is done, the acquiring company spends very little time in managing or integrating the acquired enterprise. To bring out the synergies so enthusiastically talked about while justifying the acquisition, a lot of focused effort is needed but is usually taken for granted.

When the odds are stacked against success, managers still go out and buy their next company. So what do they know about acquisitions that business academics seem to overlook?

The key to understanding why is to look at the 25 per cent of acquisitions that succeed. When the price paid is right and the new business is managed carefully to bring out business benefits as planned, then you have a situation of rapid growth. If you repeat the process several times over, you could create a global conglomerate in short order. A good example is what L. N. Mittal did prior to the merger with Arcelor; he bought a series of ailing steel companies at bargain basement prices, ran them efficiently and integrated them for their operating synergies.

In a sharp contrast, there are also cases of serial acquisitions of well performing companies as a route to growth; but there are clear criteria for what they will be bought and the price at which the deal will be done. A good example would be Warren Buffett who openly publishes criteria for acquisitions and encourages companies meeting them to approach him directly. For clarity of purpose and forthright statements on what they would not buy (‘no turnarounds, new projects or auction-like sales’), there are no four other paragraphs in the world which can match Buffett’s.

So how do you improve the chance of success in an M&A? What are the pitfalls to guard against if you must acquire?

Pay the right price, do not overpay and be ready to walk away. If the price paid is not justified by the business fundamentals of the company, no amount of subsequent management action can remedy the situation. Of all the advice on takeovers, this is the most difficult to follow and commonly ignored in the heat of chasing a deal. Egged-on by the investment bankers on both sides of the deal, buyers tend to look at price increments during negotiations as insignificant details before closing the deal; furthermore, auction-like environments bring out the worst macho tendencies in the buying party. Winning at any cost becomes a doubtful victory at a high cost.

Actively manage the acquired company from day one. There are several instances where the buyer loses interest once the deal is completed and moves on to other things. It is a fatal error to assume that the purchase objectives will be met just because the acquired company is now part of the new dispensation. On the contrary, there is a need to provide active management support to the acquired entity — short of over-managing the situation — to ensure a robust business plan complete with actions to support its achievement. Sufficient thought needs to be given well ahead of completing the transaction to questions like who will run the company and the action agenda in the first few weeks.

Don’t overrule due diligence findings. It is often seen that key observations made in the due diligence stage of the acquisition are pooh-poohed or completely overruled by the interested parties in the buying team. When there is a great keenness to conclude a deal, even serious drawbacks or weaknesses appear insignificant, and the belief is that they can be easily overcome after the deal is done. Such situations typically have to do with tax compliance, client litigation, large cases of overdue receivables, non moving inventories shown in saleable stock and the like. Not surprisingly, the selling team makes light of these findings and the acquiring company is saddled with having to deal with their aftermath after the deal. The more fundamental the weakness, the more prolonged is the cure and the higher is the risk of failure.

On turnaround deals, change the management team on day one. A complete overhaul of prevailing policies and practices is required when a company’s performance is to be substantially improved, and the existing management team is not the one to do it. However knowledgeable the team may be about the company, its products, clients and so on, the team members are heavily invested in the present set of policies and they are not about to change them. A new leader either from outside or from the middle ranks inside the company along with his choice of team members would be the one to alter the status quo. While this appears obvious, many buyers come to this decision after prolonged periods of experimentation with existing teams, while performance drags.

On synergistic deals, focus on unifying elements. Many deals are sold on the logic of synergy between companies such as cost reduction using a common service base, scaling up sales from the common client base or use of shared engineering services for better manufacturing efficiency. While the logic is very appealing, results don’t follow automatically unless someone actively integrates these aspects as a project. For a start, is there an integration czar who has complete authority over decisions on these matters? These aspects are normally underestimated and synergy is taken for granted.

Don’t keep the old honchos around. Keeping the earlier crowd on as consultants is another common mistake buyers make. Having sold the company at a good price, the old team is still around in some nebulous roles ‘to provide continuity’. In practice, they turn out to be passive critics of the new regime or become unnecessarily meddlesome when new things are tried. It’s best to have a clean break with the past after a quick hand over. Keep the old team away, but available on call when needed.

One last piece of advice — be ready for unpleasant surprises such as puny strengths or awesome weaknesses since no company is what it seems from the outside. All in all, the manager about to acquire a company will do well to remember the old line about marriage: ‘Acquire in haste, repent at leisure.’

(The writer is a management consultant and heads Alter-Ego Consulting. He can be reached at avrammohan@yahoo.com)

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