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Value Creation or Value Destruction?
Choosing Acquisitions for the Right Reasons
Driven by relentless investor expectations, many firms, and often, entire industries, consolidate because they just don't know what else to do. Once one competitor makes a major acquisition in a given industry, others follow suit for fear of becoming a second tier player, or worse...a target.
Many of our largest companies struggle to drive the kind of real and sustainable future growth that is already built into their share price. Faced with the opportunity to embrace real change, to use knowledge and other intangible assets to create breakthroughs in growth, executives will usually turn their attention outward. According to Peter Wright of The Planning Group "when we ask senior executives to think about how to break through incremental growth, the conversation invariably turns to acquisition. As significant as acquisitions are, they are often easier to fathom than innovation."
There are many great reasons to acquire or merge with other companies, and the common thread is that it fits with your overall business strategy. Purchasing another company should make you fundamentally more competitive, add complementary capabilities, or help you serve customers better for example. Our premise is that when acquisitions are made without a clear understanding of the strategic fit of a business combination, it's the first step to destroying value.
Intangibles--Priced in and then Integrated Out?
Deals are usually priced properly to include a premium for intangible--and truly valuable--assets, that in the end, acquirers often choose not to retain. Customer relationships, distribution capabilities, talent, reputation, brand, systems, and strategies are examples of these intangible assets.
Without a sound integration strategy that recognizes the complexity and effort required to retain these assets behind an acquisition, the talk about real synergy and buying for talent, ends up as nothing more than lip service. The shareholders of the target company have been fairly paid for the value that management has built up over time, but what about the shareholders of the buyer? They paid full price for these assets and their retention and integration is critical to delivering value.
Shedding assets may not always be the wrong strategy. For example, generating cost savings from redundant positions or stripping out capabilities which are a poor strategic fit for the new company are key components to adding value through acquisition. However, when the pattern emerges that decisions continuously are made to get rid of people, systems or capabilities simply because they are those of the acquired firm, executives are acting squarely against the interests of their own shareholders.
Why do firms often end up systematically de-valuing these assets? Given the crushing expectations, integrations must be expedient, and that means making tough choices to quickly rationalize just about everything. Under intense pressure we often make decisions based on what we know and what we are comfortable with. The stated objectives of creating true synergy, choosing the best of both, and consolidating strength can fall quickly to the wayside in biased decision-making processes. Often-unintended discrimination about "the way things are done around here", in the worst examples amounts to nothing more than corporate cleansing. The diligence and integrity required to truly attain productive synergies that allow combined organizations to be more than merely the "sum of the parts" must be actively led, modeled and measured from the executive team throughout the process.
Ensuring One Plus One is Greater than Two
We are often asked if it is even possible for real positive synergy to be created in the messy world of acquisitions. We believe not only that it is possible but it is absolutely necessary if companies are truly to deliver on-going shareholder value. Acquisitions create noise on financial statements, and lots of it. For some firms, acquisitions hide the weak prospects for sustaining growth the old-fashioned way...organically. The Nyren Collaboration principal, Jill Nyren, asserts, "If the approach to acquisitions is not about creating real synergy...empowering combined strengths, generating new capabilities and technologies, and accessing new prospective markets...the distraction from underlying fundamental problems will be short lived. It is only through a focus on the intangibles as well as the tangibles that we fundamentally change the future capacity for growth of our organizations."
Strategically considered and thoughtfully managed acquisitions, mergers and joint ventures offer incredible opportunities for enhanced growth and re-shaping companies and industries, but only if they are done right!
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