Without Change, the M&A Boom Will Stunt Economic Growth
Welcome to CFO.University’s transcript of Grant Jones’ CFO Ed Talk? Without Change, the M&A Boom Will Stunt Economic Growth. Grant highlights studies that show M&A is a statistical failure. But he gives us hope with three ideas on how to improve the rationale for doing acquisitions, as well as improved success rates.
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Here is Grant.
I liken mergers and acquisitions to terminal illnesses. We all either know somebody or have ourselves been impacted by a terminal illness and our outlook has been quite negative. I blame this negative outlook on the famous quote by Albert Einstein that goes “We keep doing the same thing over and over again, expecting different results”. This is also known as the definition of insanity. To give some scope to the problem, we’re actually coming out of record M&A activity. From 2010 through 2017 we’ve had 67,094 reported transactions. This led to $6.55 trillion exchanging hands. Well, it’s all the big deals that get the big headlines. According to PitchBook, roughly 70% of all deals done around the globe are less than $100 million in transaction value. This means the overwhelming majority of transactions are actually your local, family-owned or privately held businesses.
There were some substantial economic benefits. First and foremost, this created substantial liquidity for the exiting owners to move on with life, or simply move on to retirement. Coupled with this was the acceleration of the entrepreneurial cycle. These exiting owners went off and created new ideas or new businesses. There was also a huge lift to the financial and banking sector. As we came out of the Great Recession, the banking sector was crippled. To do $6.55 trillion in acquisitions means we had to go out and borrow substantial amounts of money. This was a great lifeline for the banking sectors as we came out of the recession.
If you were to go Google M&A success rates, you would get a different story. M&A is a complete statistical failure. Regardless of your source, Forbes, McKinsey, Harvard Business Review, they would all argue that M&A fails over 50% of the time. Now, failure is somewhat in the eye of the beholder. But, across the board, all these would define success or failure as not accomplishing the goal that they set out with when they moved forward with an acquisition. Now, if we were to do some basic math, if we spent $6.55 trillion on acquisitions, that means we wasted $3 to $4 trillion on acquisitions. It could at least be argued that there was a huge opportunity cost for what could have been. Now since 2010, we’ve had some real doozies. In 2011, Google acquired Motorola for $12.5 billion. Two years later they sold it off for $2.81 billion, almost a $10 billion economic waste.
Then again, in 2014, Microsoft acquired Nokia for $7.9 billion. Just one year later, they wrote off almost the entire amount. Apparently, it was a tough time to be buying cell phone companies. However, most experts would say the worst deal in history was in 2011 when Hewlett Packard acquired a company called Autonomy for $11.7 billion. One year later, they wrote off $8.8 billion to eventually sell off the pieces in 2016 for $170 million dollars. This was roughly an $11.5 billion economic waste. Now, some would argue that there’s residual value to these acquisitions. And I would agree. However these write-offs aren’t without consequences. No question, there was substantial job loss as well as loss of shareholder value. But, so what? Why does this matter? Forbes estimates that between 2015- 2025 there will be $10 trillion of business value transition. This means in 10 years, $10 trillion of business value will find new ownership. If these success rates hold true, we have the potential for $5 trillion of more economic waste. Now, if you were to go back to that original Google search and ask, why does M&A fail? You’re going to get all the same sources to tell you all the same reasons. I’m going to summarize these into two categories.
Why M&A Fails
The first one being poor integration. This includes topics like a cultural mismatch, missing key leadership roles or not keeping talent. This also includes lack of a solid due diligence process; where the skeletons reveal themselves after the acquisition or even the ego of the acquirer getting in the way, “ It’s going to be our way or the highway”.
Then there’s acquisition rationale. This is not having a strong selection process or what’s deemed poor strategic fit. Often times, this means there was an overestimate of synergies, frequently a financial model including cost cutting that can’t be realized. And then there’s this grand revenue scheme where one plus one’s going equal five and they end up falling short. You could also simply have poor deal terms or just overpaid which leads to poor decision as desperation rules the day? While I would argue integration is important, if you didn’t have a strong rationale for why you did the acquisition in the first place, it’s going to fail.
How to Improve M&A Success Rates
So, here are three ideas that will help improve our value creation rationale and improve our success rate. To learn Grant's three ideas go to Without Change, the M&A Boom Will Stunt Economic Growth
Watch Grant's CFO Ed Talk? or listen to the Podcast Here!
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