"All the world's a stage,
And all the men and women merely players:
They have their exits and their entrances;”
William Shakespeare, "As You Like It" Act 2/7
The Real Reason Behind Acquisition Failure
There are myriad articles which study the high failure rate of acquisitions – both for the acquiring and the acquired company. There are, in fact, two types of failure and they tend to get confused.
Firstly, there is the failure to actually make an acquisition - This is often what executives first think of when discussing the subject. In other words, they have in their business plan that they intend to grow via one or a number of acquisitions but they are not able to make that acquisition - or acquisitions - within the allotted timeframe.
Although this is a fairly common acquisition failing, for the purposes of this article, we shall focus on the company that makes an acquisition, yet still fails to accomplish the intended objectives, outlined in its M&A Strategy.
Why it’s Essential to Finetune Your M&A Strategy
In many cases, the term “M&A Strategy” may be rather overstating the reality of the situation, as so many companies embark on their acquisitive quest with little more in their ‘battle plan’ than a nebulous idea that has been discussed at a few Board meetings. The basis of such discussions then leads to the decision to acquire in order to add customers, technology or revenue. However, this is not an M&A Strategy. It is simply a vague statement of intent and should not be confused with a properly defined M&A Strategy.
Study the Form
If you find yourself questioning whether a carefully planned M&A Strategy is strictly necessary, then just consider the M&A failure rate statistics: a recent Harvard Business Review estimates that the likelihood of an acquisition being deemed a failure is in the region of 70% to 90%, whilst Forbes pegs the failure rate at 83%. Then ask yourself the same question again.
Positive M&A Outcomes
To look at the reverse side of the equation, recent studies of positive M&A outcomes, indicate that true success rates are probably in the region of 20-25%. The reason the latest estimates have reduced the M&A success rate further than previous studies, it is claimed, is because most CEOs don’t publicise their defeats. All of which supports the average likelihood of M&A failure of between 75-90%.
Dire Consequences of Failed M&A Events
Which other area of activity do people repeatedly undertake where expenditure can be counted in the millions and yet, the average success rate is so low?! To put this into perspective, a failed acquisition can be the cause of the acquiring company failing. That failure could be from being weakened to the extent that they are themselves, taken over or, in economically tough times, they may simply go out of business altogether. Therefore, making acquisitions should not be taken lightly.
>50% of LOI’s fail to complete
Another aspect of failure that is often overlooked is that more than 50% of Letters of Intent (LOI’s) fail to progress to an acquisition. This means that there is a huge amount of time, effort and money being wasted. Valuable executive management time is being squandered, without generating any positive results. In all probability, considerable costs will have been incurred as well, depending how far due diligence had progressed. Another critical point to consider, is the time and focus a sale can consume, distracting the owner/executive team from the daily running of the business. Such a lack of focus can have a disastrous effect on company performance, precipitating a downward trend, which could quite rapidly cause a decline in the perceived value of the company - and therefore, a decrease in the purchase price sought.
A Successful Acquisition Can Drive Growth
Despite the very high failure rates of acquisitions, it must also be acknowledged that, when correctly undertaken, acquisitions can also be a very effective - and rapid - way to drive growth in your business.
There are countless, well-documented examples where the acquisition strategy of a company has been one of the primary reasons behind its success. Shareholders and owners want to grow a profitable business and add value.
Reduce Your Acquisition Risk
The real reason that most acquisitions fail is that there are a number of critical steps that must be completed; there are no short-cuts. The simple fact is that, these steps are either being completed in such a slapdash, ad hoc and unscrupulous manner, that the work is proving worthless – or they are not being taken at all.
It really is as simple as that: short-cuts are being attempted or M&A planning is being completed that is not of the required standard. How many times do we see failed business plans in companies where the development of a new product or service is neither aligned with Sales & Marketing, nor in line with what the market is really seeking?
As a buyer, will the acquisition really make a step change to your business? As a seller, do you understand and can you articulate the true value of your business to the right buyer?
Plan for Success
Without a clear acquisition strategy in place, you are heading for likely failure. These important steps need to be clearly defined and firmly in place, before you even start to consider identifying the right fit; otherwise the likely result will be a costly and painful M&A failure.
About Mark Edwards