Conventional wisdom – backed by plenty of research by esteemed consultancies such as KPMG, A T Kearney and McKinsey & Co – suggests that four out of every five mergers/acquisitions fail to deliver shareholder value. So despite the billions of dollars flowing into transactions every year globally and the collective intelligence levels of the deal-makers involved, 80% of more fail to live up to the expectations of the acquirer or merger partners.
In my 15 years working in the lower mid-market (private enterprises valued up to $10 million), I have seen M&A done extremely well. I have also seen it done extremely poorly and to the detriment of shareholders. Reflect on the disaster that was Humanis (which became Bluestone after an acquisition of a large private company by that name), the questionable acquisition of Ross Human Directions by Chandler Macleod and the house of cards that Rubicor was always set up to be, for evidence of M&A failing to deliver on shareholder expectations. In each of these cases, there exist myriad reasons for this failure, but there is one constant.
This misalignment rears its head in so many ways. One of the more common occurs in the acquisition of privately owned businesses by a larger private or public company. The vendor is often heading for the exit within a relatively short period of time whilst the purchaser is investing for the long-term. Immediately, there exists a misalignment of interests, as the vendor is looking to maximise the cash value of the asset being sold, whilst the purchaser is more interested in achieving an expeditious return on investment. Earn outs, the bane of private company transactions, magnify this misalignment by highlighting the different motivations: the purchaser wants to pay as little as possible for the asset whilst the vendor wants to achieve the maximum. Little wonder that so many earn outs end up in tears (most often those of the vendor).
Similarly, cultural misalignment manifests as change pain, making the transition of ownership far more onerous and expensive than originally expected. Once an acquirer completes a purchase, all too often the integration of the acquired business means changes to systems, branding, compensation structures, organisation charts and job descriptions. As a case in point, the original merger between PriceWaterhouse and Coopers & Lybrand when the Big 4 were still the Big 6 was a case in point. By all accounts, the PwC merger experienced prolonged integration pain due to those many differences that existed at cultural and operational levels.
Misalignment of strategy is another common culprit. CEOs and Boards, under pressure to drive share price growth, look at acquisitions as an effective way to add revenue, capability and/or geographic coverage all in a single transaction. Where such pressure exists, the search for appropriate deals means that in many cases they settle for the best they can get at that point in time to meet their KPIs, rather than waiting for the ideal opportunity: the right business on the right terms. Strategy misalignment often manifests as overpaying for an asset, as the prevailing mindset appears to be that the markets are more interested in revenue growth and “accretive growth in EPS” (earnings per share) than solid fundamentals. Interestingly, it is the well-funded public companies that appear to be more at risk of making poor decisions, as CEOs and Boards are not investing their own money, but that of a large company with a diverse shareholder base. It seems to be the private companies that are more risk-averse due to the fact that the decision makers are the primary shareholders, and it is their personal wealth that is put at risk if a deal goes south. Perhaps that’s why the majority of happy acquirers I deal with are masters of their own universes, rather that CXOs of public companies.
There are countless other examples of misalignment contributing to the destruction of shareholder value through M&A, but a final look at the top of the list would be the misalignment of advisers’ interests. If you consider the external advisers party to a transaction, it is easy to see where such a lack of alignment would exist. Accountants are at risk of losing a client if a deal goes through. Much the same could be said for lawyers. Investment bankers and intermediaries are remunerated primarily on a transaction going ahead, so their motivation is almost always to get a deal done, perhaps at any cost. The major hurdle here is self-interest, which varies considerably across all of the stakeholders to a transaction.
So what can be learnt from a consideration of misalignment as it relates to a perceived lack of effectiveness of M&A activities? If company owners, Boards and C-level executives want to avoid being on the wrong side of the statistical divide, more care needs to be taken throughout and particular care given to the question of alignment. Are the acquirer’s intentions and motivations aligned with those of the vendor? Is there cultural alignment between the two parties to the deal? Does the planned transaction align with our strategy? And is the advice we are receiving aligned with the the best possible outcome?