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Caveat emptor Featured

9:33am EDT July 22, 2002

I began my career doing acquisitions for a well-known, high-flying New York Stock Exchange company.

Of the several acquisitions I was a part of, almost all turned sour financially or failed to deliver on the anticipated synergies with our core business, which was based on proprietary technology. This was a smart, highly successful company, and I was surrounded by talented people. Why, then, did nearly 100 percent of our acquisitions fail?

I learned later that we were not alone. Few firms are good at this game.

McKinsey & Co. a few years ago studied more than 100 acquisitions and determined that only 23 percent were a success. A full 60 percent failed so badly they didn't even recover the costs of financing the transaction. Most were described as triumphs of managerial adrenaline over management intelligence.

Other research suggests few acquisitions add real value. While shareholders whose companies are bought often get rich, shareholders of the buyer seldom do. In addition, acquisitions often spook employees of both firms, who sense that "enhanced operating efficiencies" spell layoffs. They signal competitors that customers and good staff are up for grabs and can wreck the carefully nurtured cultures of both firms.

The moral, however, isn't that acquisitions are wrong, but that they are risky.

Organic growth in a mature market can be grudgingly slow. Making acquisitions seems to be an easier route to growth and is certainly more exhilarating. There are some good reasons to acquire -- to obtain or improve a specific skill set or product capability, to strengthen an existing specialty or product line, or to round out a territory expansion.

Acquisitions can work when you target a firm that shares a similar outlook and philosophy, as well as complementary ways of viewing clients, key people and markets. Doing a deal involves a series of delicate compromises. Focus on the marriage, not the wedding.

Too many executives duck the hard questions until after the deal is done. But after the investment bankers, accountants, consultants and lawyers have left with their hefty checks, the real work of an acquisition begins. An entire consulting industry thrives on salvage operations to recover some value from ill-conceived acquisitions.

Blending two companies is enormously difficult and few are really good at it. My brief experience doing acquisitions taught me to be alert for:

  • Consultants with their own agendas, aggressively pushing the deal.

  • Limited consideration of post merger integration issues, especially when blending different cultures.

  • Inability to clearly solve leadership issues before the close.

  • Distorted buyer expectations driven by higher than average valuations.

  • Distorted seller expectations driven by abnormally high past sale "synergy" expectations.

  • Caveat emptor means buyer beware. Go slow -- impetuous acquisitions can be a blueprint for disaster.
Tom Harvey (tharvey@assurex.com) is president and CEO of Columbus-based Assurex International, a global organization of commercial insurance brokers. He began his career doing acquisitions with a Fortune 500 company.