The Acquisition Conundrum – CEOs, Directors & Shareholders

McKinsey & Company estimates that almost 70% of mergers fail to meet financial performance targets. Harvard Business Review places that number at 70% - 90%. There are many factors cited for these failures except for the three most critical: 1) Wall Street; 2) executive compensation programs, and 3) timing.  

Wall Street’s relentless drive for never-ending revenue and profit growth reward, on a short-term basis, companies that grow through acquisitions and then punishes them later when the acquisitions fail. Conversely, Wall Street punishes the stock price of companies that exercise greater caution for being seen as slow-moving and their leadership is deemed weak. On the C-suite side, conventional wisdom states that executive compensation tied to the same metrics used by Wall Street is required to align a public company to Wall Street drivers of increased stock value.  If a Board of Directors pushes back against acquisitions, it risks losing its management team.  If a Board is too deferential, it risks losing shareholder capital and breaching its fiduciary duty.

Timing is the key to re-aligning incentives to reduce acquisition failures.  Andrew Carnegie created an industrial empire by following a simple maxim, stockpile cash during strong economies, make acquisitions during recessions. That rational approach guaranteed that Carnegie could buy low and extract great value over the long term. Boards can apply Carnegie’s maxim by aligning their shareholder messaging and modifying executive compensation plans to incorporate timing. Rather than punish CEOs and senior management for prudence, reward prudence, execute acquisitions during recessions and measure success during economic recoveries. While some executives might be unwilling to practice patience, management teams committed to building long-term value will embrace this as a more rational approach to success.