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Saturday 17 December 2011

Why So Many M&A Deals Fail


patched tree
While some M&A deals turn out to be great successes, it’s no surprise that a lot of mergers and acquisitions fail.  The obvious factors explaining the failures include culture clashes or founders leaving—taking the DNA with them in the process.
But M&A is more art than science, and the reasons why so many deals fail to deliver on their 1+1=3 promise are complex.  Here are some:
The right hand isn’t talking to the left hand, part 1: buy vs build
Many buyers initially seek to “build instead of buy”, so a company may buy an asset that directly competes with an existing business unit, be it established or emerging.  This not only leads to culture clashes and turf battles, but it creates a lot of operational confusion.  In other words, even if everyone has the best of intentions, you either need to put an objective, arbitrary person to chaperone this initial rough process or put the heads of the respective units in a room until they determine a course of action.
Become part of the solution or remain a problem
Ideally, before the deal is consummated, the head of the unit that is buying should be brought in to become part of the discussion and process.  While initially this may bruise some egos and seem like mission impossible, it’s a lot better than the alternative, which is someone trying to torpedo an expensive acquisition behind-the-scenes.  When Google acquired YouTube, the Google Video team was part of the integration while the Google founders were empowered to drive the strategy; all stakeholders understood that the future of video within Google lied with YouTube.
Lack of funding reduces velocity
Startups are scrappy and stretch every dollar.  But when a company sells, they are slowed down by the new processes and administrative realities of the buying party.  To compensate for the reduced speed requires adding more force – or resources –to maintain the same velocity, let alone add to it.  Google and Dennis Crowley’s Dodgeball are a prime example.
“Skate to the where the puck is going, not where it’s been”, Wayne Gretzky
AOL buying Bebo is a classic textbook example of a buyer betting big on yesterday’s trend.  It wasn’t so much that social media had peaked by 2008, but Facebook had already won that battle against MySpace and Bebo wasn’t a strong enough player to give Facebook a run for its money.  AOL sold Bebo for a reported $10M after shelling out $850M.
No safety of margin
Warren Buffett invests in businesses that i) he understands and ii) give him a safety of margin.  Unlike investing, M&A is oftentimes specifically about buying a new, foreign business that management can’t build from within, so half of Buffett’s mantra does not really apply.  But the second part of his philosophy does: companies that overpay – like AOL for Bebo – start so far behind the eight-ball that nothing can right the course.
The right hand isn’t talking to the left hand, part 2: corporate vs business development
In an ideal scenario, the corporate and business development deals communicate effectively and work together to align their objectives against the resources available to reinforce the broader company goals in a reasonable timeline.  I stress “ideal”; more often than not, these two departments have somewhat different agendas, albeit subconsciously (and frankly, both parties are “right” given their roles).
After all, business development is seeking solutions that can help them in the short and long term, whereas corporate development is looking to justify the bandwidth a deal requires at best, and at worst is gunning the big splashy name to acquire to add to their resume, the same way an investment banker wants to put up the proverbial tombstone on their Deals page.
For example, Reddit’s growth after the Conde Nast acquisition made corporate development look good, but business (and editorial) failed to do much with it, leading to its spin-off into parent Advance.
Pride
When company A buys company B, there’s a hypothesis that the combined entities can get more done faster; before a deal closes, and in the early period following it, there’s a theoretical framework and planned timeline to accomplish that.
But realistically, it’s very possible that none of that actually holds water.  Let’s face it, most venture-backed companies sell to the highest bidder and not the best dancing partner, as such, they may pitch a story and paint a picture that is less-than-realistic at best and downright false at worst.  If this is an innocent mistake, it’s really best to tear up the game plan and pursue the strategy that will yield the greatest result, but sometimes that means admitting to being wrong, which human beings tend to hate doing.
Greed
As mentioned, entrepreneurs and management should sell to the company that will create the most value in the year or period that follows the deal, but management has a fiduciary duty to maximize shareholder value, so there is an essential misalignment for all stakeholders.
The flip side is that buyers occasionally press the revenue pedal too aggressively early on.  There is nothing wrong with trying to maximize sales – that’s the whole objective, but in some cases, a little bit of patience and tact will go a long way in not alienating the community and user base or clients.
An overly aggressive sales culture
Startups need to explore all avenues to grow sales.  But sometimes private companies pursue revenue even if it doesn’t reinforce their strategic objectives or isn’t profitable.  In these instances, the buyer ends up paying a multiple of revenues to acquire a business, but afterwards it may decide to discontinue those revenue streams, thinking that it will find synergies with its core business or new ways to monetize the assets it bought.  This rarely works, and combined with the higher operating costs of acquired unit, the buyer then finds itself in the unenviable situation of shutting down the unit or scaling back… effectively wasting the money it spent on the deal.
Dishonesty and lack of loyalty
Failures are not only the result of bad decisions by the buyers; sometimes the seller already has an exit strategy long before the deal closes.  In my interview with Shark Tank’s Kevin O’Leary, he said the responsibility to make a deal successful lies solely with the buyer, but I think that the selling CEO or founder has an obligation to make the deal work, too.
Retention
Last but not least, a company’s success is rarely attributed to the founder or CEO alone, but rather, to a broader base of employees.  When a buyer is finalizing a sale, they tend to hone in on the key person, and this sometimes both alienates other key personnel and disillusions them when they see their roles and responsibilities reduced.
It takes two to tango
While departing founders are usually listed as a common challenge, the reality is that most buyers are driven to make the purchase by an internal champion on the business side.  If that person leaves, then the acquired asset runs the risk of becoming an orphan with no one willing to fight the battles on your behalf and evangelize the seller within the organization.
Ultimately, M&A is a natural part of any company’s growth strategy. By knowing the common causes why some deals fail you can try to avoid them.
Source:http://techcrunch.com/2011/12/17/why-so-many-ma-deals-fail/

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