I typically do not like companies to undertake spectacular acquisitions or mergers. Large mergers and acquisitions have so many inherit risks that could derail them. Actually any merger of any size has the same issues and risks that can scuttle the transaction but with smaller acquisition the impact can be negligible.
Mergers can appear wonderful on paper as they offer new markets, synergies...etc. However their success or failure rest on implementation and execution of the integration plan. And I think the biggest threat for the success of these mergers is the resistance to change. It is human nature to keep at the same ways of doing things; you are comfortable and you have the know how, why change. This is a big hurdle to overcome. And that is why most mergers fail.
Management execution plans must be set with the mindset of "plan to fail and manage for success". In the book "Billion Dollar Lessons" the authors detail some of the misguided actions and red flags to the management's strategic plans. Those red flags can serve investors as well in assessing the value of their investments.
Illusion of synergy
Trying to archive a better distribution network, economies of scale, cutting overhead...etc are all good reasons to undertake an acquisition. But rarely do these synergies materialize. The authors offer these red flags:
- The synergy may exist only in the mind of strategists and not in the mind of customers.
- ....overpaying for an acquisition
- ....clashes of culture, skills or systems can mean that synergies that seem easy to achieve can be impossible to get.
Some companies adopt the strategy of rollups in fragmented industries. It makes sense for a company to operate more efficiently by merging tens or hundreds of smaller businesses given them economies of scale:
- better bargaining with suppliers,
- lower cost of capital,
- lower overhead costs as you spread them over many entities,
- more efficient distribution networks,...etc
- Rollups went for scale that would not produce economies. sometimes, rollups wound up with diseconomies of scale.
- Rollups required an unsustainably fast rate of acquisitions
- Companies did not allow for tough times- and it seems that every rollup runs into tough times at some point.
- Companies assumed that they could get the benefits both of decentralization and of integration. ...[they] often found, that they could choose either decentralization or integration but not both.
Companies, often, to achieve growth expand to adjacent markets and products. For example a passenger bus transportation company moving to ambulance services as both businesses are about moving humans from point A to B. More often than not management are surprised that these adjacent markets are not similar at all to their core business and the venture end up costing them dearly. Some takeaways from the book:
- The move is being driven more by a change in a company's core business rather than a great opportunity in the adjacent market.
- The company lack expertise in the adjacent market, leading the company to misjudge acquisitions and mismanage the competitive challenges of the new market.
- the company overestimates the strength or importance its core business capabilities will have in the new markets.
- A company overestimates its hold on customers, leading to expectations of cross-selling or up-selling that won't materialize.
Following the "killer app" vision can be tremendously costly and horribly unsuccessful. The desire to lunch the next Netscape or Ipod can lead to disastrous results. Management has to think what business are they in rather than what technology or idea is more sexy.
- They [companies] evaluate their offerings in isolation or at a single point in time, rather than in the context of how alternatives will evolve over time.
- They confuse market research with marketing, allowing their entrenched interests and hopes to colour the analysis of true market potential.
- They find false security in competition,...presence of rivals equates to a validation of the potential market.
- They design the effort as a front-loaded gamble, foreclosing possibilities for adaption and severely limiting the option to stop.
Consolidation in distressed industriesMaturing industries or more bluntly in trouble industries like News papers, news print media and news print paper more often consolidate. These industries are facing decreased demand for their products and industry overcapacity. Most adopt the consolidation strategy to cut overcapacity, achieve economies of scale and raise prices if they can. The trouble is :
I tend to not like serial acquirers or vision builders but I sometimes get suckered into the sales pitch of management. The above list should give me a solid checklist to keep the analysis honest.
- you may not be buying the assets you think you are buying; you may also be buying problems.
- ...there may also be disconomies of scale because of increased complexity.
- ...you may not able to hold onto customers.