70% of Acquisitions fail to deliver positive returns
How many firms would be willing take on a major project which had an expected 70% failure rate. This is the rate of failure of major acquisitions according to numerous research studies over the last 20 years. However, you need to be careful how you interpret the data. Most of these research studies are based on the movement in the share price of publicly listed acquirers in a short period before and after the acquisition. The assumption has been that a drop in the share price soon after the acquisition indicates a failure to enhance shareholder value as a result of the acquisition.
Other studies have shown a significant loss of acquired senior management within nine months of the acquisition, frequent losses on the subsequent sale of an acquisition and significant delays in achieving integration objectives.
Acquisitions are highly disruptive
You do need to be cautious with these results however. Share price movements over a short period after an acquisition are not necessarily indicative of long term results. Losses of acquired executives and delays may be anticipated by the acquirer and be factored into the evaluation. Even so, it is not unreasonable to expect a high rate of failure as many large scale acquisitions take on a level of risk which well above that which most corporations experience in their normal investment projects and few have the experience to handle such change situations.
Few companies really appreciate the size of the task they take on with a large acquisition. In many cases it will be the largest investment a business makes, certainly on a grander scale than, say, the investment in a new factory or the entry into a new marketplace. At the same time, this is a project which is undertaken over a relatively short period of time, often just a few months of evaluation and negotiation and yet it can significantly change the size and structure of the acquirer. Such a project can also be highly disruptive to both the acquirer and the business being purchased and all this is going to happen in a condensed timescale. No wonder few companies get through it unscathed.
Few buyers undertake a full evaluation
The of course there are corporations who have a long record of acquisitions success. What do they do differently? Generally they fall into two camps, those who are undertaking consolidations of similar business and allowing them to remain as stand alone business and those who are buying small firms with high strategic value. Avoiding large scale integration seems to be one way of ensuring a better outcome. Alternatively taking on a smaller firm where the upside is significant and the organizational impact is low seems to be the other successful strategy.
While there are numerous things which can go wrong in an acquisition, the most frequent causes would appear to be based on cultural differences and the failure to integrate organizational units or to manage the people aspects of the acquisition. Too little effort seems to have been put into anticipating employee concerns both within the acquirer and the acquired businesses. Losses and delays due to high levels of uncertainly resulting in resistance, disruption and loss of productivity appear to be common outcomes. Managing change would seem to be a talent which few corporations are good at and many ignore until it is too late. Perhaps a lesson in this for all of us!
