Mergers & Acquisitions: The three big mistakes

Mergers & Acquisitions: The three big mistakes

August 31st 2020

Uden/ The Netherlands

www.joriskersten.nl

Author

Joris Kersten (1980) is an independent M&A consultant and valuator from the Netherlands.

In addition, Joris provides training in valuation and financial modelling at the leading (“bulge bracket”) investment banks at New York, London, Hong Kong and the Middle East.

And Joris provides lecturing in Corporate Finance & Accounting at leading Universities all over the globe (e.g. Peru, Surinam, Kuwait, Mongolia, Australia, Dubai, Mumbai, Singapore, The Netherlands and Luxembourg).

At his LinkedIn page > 60 of his (free) articles on valuation can be found.

Moreover, there you can also find the calendar of his open training programs in The Netherlands and online.

And 130 recommendations on his training sessions can be found on: https://www.joriskersten.nl/nl/reviews

Source used

For this article I have used the handbook below as a source.

The book is brilliant, and written by two experienced EY M&A consultants and a professor in Corporate Finance:

·       Why deals fail & how to rescue them (2016). The economist books, London. Anna Faelten, Michel Driessen, Scott Moeller. 9781781254530.

Introduction

Global M&A deal making broke the 5 trillion USD barrier in 2015. And this was 3.7 trillion USD in 2007. This according to data on announced deals by ‘Dealogic’.

And the combined value of all M&A deals from 1980 to the end of 2015 was almost 65 trillion USD.

Now the question is whether M&A deal making hurts of helps business and the economy overall?

The answer is that M&A, when properly done, drives corporate and economic growth!

But the other way around is also true, when poorly done, it can damage business and the economy.

I will give you some more statistics on success rates later on.  

(Faelten, Driessen & Moeller, 2016)

Introduction: The three mistakes in M&A deal making

When Hewlett-Packard (HP) took over the UK company called “Autonomy” in 2011 nobody predicted the disaster that would follow post-deal.

Just 12 months after the deal HP was facing write downs of 8.8 billion USD, nearly 80% of the 11 billion USD they paid for the company called “Autonomy”.

HP argued they were victim of fraud by Autonomy’s management and its auditors, blaming the losses on accounting failures.

(Faelten, Driessen & Moeller, 2016)

Hewlett Packard (HP) and the company called “Autonomy”

HP was founded in their famous garage in Palo Alto (Silicon Valley) in 1939.

They were one of the core Silicon Valley start-ups and later one of the biggest manufacturers of computers.

In 2010 Mr. Leo Apotheker became CEO (ex SAP) and the market was expecting immediate acquisitions since HP’s share price was suffering.

The company “Autonomy” was a Cambridge University spin-off, founded in 1996, and a success story. HP announced a bid in 2011 of a stunning 64% premium on the share price of Autonomy.

Autonomy was one of the fastest growing software businesses in the world. Their main product was the “Intelligent Data Operating Layer” (IDOL), a highly intelligent tool for indexing unstructured data.

So HP bought the company at a record high price, and most of this price was written down withing two years after the deal.

HP blamed the huge write offs on the accounting practices of the acquired company, but industry experts and analysts were questioning the accounting practices of Autonomy for years already.

So HP should have dealt with these accounting issues in the due diligence, both pre-announcement, and pre-completion, of the deal.

(Faelten, Driessen & Moeller, 2016)

Post-deal of the Autonomy transaction

The decision to use acquisitions to buy yourself into a certain strategic paths is commonly used by companies.

But there are a number of alternatives of M&A which should be evaluated as well.

And these could have been, for example for HP, less risky.

On top of that, when one believes M&A is the right tool, than the decision for which target company to go is also a tricky one.

Buyers need to find a target that is both a strategic fit, and the target needs to be ‘in the market’.

And it is possible that HP focused too much on its target Autonomy, a common error for buyers. This since with this standpoint buyers lose their bargaining power when negotiating the final price.

(Faelten, Driessen & Moeller, 2016)

Mistake one in M&A: Planning

Within the HP/ Autonomy deal many mistakes took place.

But Mrs. Faelten, Mr. Driessen and Mr. Moeller identified three overall mistakes in M&A deal making. They mentioned them in the book that I have used as a source for this article:

1.     Failure of planning;

2.     Failure of communication;

3.     Failure to properly consider the impact of people.

Let’s start with mistake one: Planning.

Using the HP example then we can conclude that the acquisition of Autonomy was a risky one, even for HP.

HP had a value of about 100 billion USD and Autonomy about 11 billion USD at the time of the acquisition.

The target was magnified a lot because HP based their future on the strategic wins obtained by the transaction.

But when you do not have a clear, detailed, well over thought, and articulated deal strategy, the no planning of the integration will be sufficient!

Hubris will therefore be one of the most common M&A pitfalls for business leaders since underestimation of the M&A integration task is easily done.

In subsequent blogs on this topic "M&A success", I will talk with a lot more depth about deal strategy & planning.

(Faelten, Driessen & Moeller, 2016)

Mistake two in M&A: Communication

HP’s failure to communicate the benefits of the deal convincingly to their stakeholders resulted in a significant fall of their share price on the day of the announcement.

The expected “synergies” should be clearly communicated in the due diligence phase!

And the 100-day integration plan should be written when the deal is announced.

Within the case of HP, a net present value of 2.9 billion USD synergies were expected. This, amongst others, should justify the 24 times trailing EBITDA that was paid for the enterprise. 

On top of that, HP admired the culture of Autonomy. But they did not truly understand this culture, and they did not know how to adopt it by HP’s other divisions.

All these issues need to be explained and communicated well to the stakeholders of the company.

(Faelten, Driessen & Moeller, 2016)

Mistake three in M&A: People

Poor communication and a lack of understanding of the culture of Autonomy led to the third failure: The appreciation of the value of people.

Autonomy’s culture was a culture that HP wanted.

But they failed to learn, and lock in, the more entrepreneurial culture of their expensively bought target.

(Faelten, Driessen & Moeller, 2016)

Additional issues in M&A

In the subsequent blogs on this topic; "M&A success", I will talk with a lot more depth about the above success factors and issues.

And maybe you are surprised that “price & value” have not come up yet as one of the big mistakes in M&A.

Of course this is a (huge) issue, but "price & value" are not part of the three big mistakes in M&A.

Reason is that there is not such a thing as the “right price of a deal”.

This since it really depends on the buyer’s view of the financial future of the target and the expected synergies.

So determining whether the price was really right can only be done afterwards!

Have said this, ceteris paribus, the lower the price paid, the more easy a successful transaction can be achieved!

(Faelten, Driessen & Moeller, 2016)

Success rates of M&As

Numerous studies from the 1980s and 1990s show failure rates in M&A of about 70% to 80%.

And more recent studies show failure rates of about 50%.

But this still implies the high risk of M&As and the need to understand what drives M&A success!

Globally about 25.000 to 35.000 M&A deals take place yearly.

So they are not a rare phenomenon at all!

In the subsequent blogs/ articles on this subject I will study/ evaluate the success factors of M&A more carefully.

This in order to come with some rules of thumb that can help you when working on, or being part of, M&A transactions!!

(Faelten, Driessen & Moeller, 2016)

Source used

For this article I have used the handbook below as a source.

The book is brilliant, and written by two experienced EY M&A consultants and a professor in Corporate Finance:

·       Why deals fail & how to rescue them (2016). The economist books, London. Anna Faelten, Michel Driessen, Scott Moeller. 9781781254530.