September 5, 2006

Board Survey on M&A and Value Creation

The Fall 2006 issue of Directors & Board’s Boardroom Briefing focuses on M&A issues for directors. The Fall issue includes analysis of the survey query: “On balance, mergers and acquisitions destroy more value than they create. Do you agree or disagree?” The survey results were:

– Strongly agree: 23.1%
– Agree somewhat: 38.5%
– Disagree somewhat: 30.8%
– Strongly disagree: 7.7%

Here are some comments from survey respondents:

“We tend to make judgments about what is visible to us. All we read about are the unsuccessful mergers, so common wisdom is that they destroy value more often then they create value. So, while I believe that mergers destroy value, I recognize the limitations of not approaching the question from an empirical point of view.”

“Surprisingly, the skills to successfully integrate a target are not in the toolbox of most acquiring companies. Having participated in multiple value-creating acquisitions, it’s much like war and a simple process:
1. Control the lines of communication and explain objectives, strategy and how missions are run in your army.
2. Move quickly on personnel decisions, benefits alignment, and culture.
3. Honorably discharge dissenters.
4. Insure early victories and wave the flag.”

“While the new combined assets may be more competitive, the time and energy required to manage a successful transition takes energy away from core businesses. Rarely are the expected synergies able to overcome the premium paid in a takeover.”

“The research shows that it is the rare company that creates sustainable economic value as a result of M&A activity. Successful integration and growth seems to elude most companies.

“Good managements often do great long-term deals that do not look too good in the short term. Since the Street is overly focused on short-term results, the impression we often get is of value destruction. Often this is due to failure to take a legitimate long-term view.”

“I personally have never been with a company that made an acquisition be non-accretive, but some have been marginal. I have also gone into companies where previous acquisitions had proved to be a horrible mistake and had to be closed down or sold. It depends on how well the target fits into the strategic goals, the quality of the due diligence, and the attention paid to the integration process.”

“Sadly, from my observations over 25 years as both a senior executive and consultant, it’s probably true that M&A destroys more value than it creates. The rosy growth and synergy forecasts managements use to justify their winning bids in an increasingly competitive M&A market are rarely met. More often than not, the only real winners in a transaction are the sellers  who’ve enjoyed a unjustified transfer of wealth/value from the buyers, something the buyers discover (if they are objective enough do a post-mortem) only after struggling mightily, yet failing to deliver, against forecasts they had little confidence in to begin with.”

“The central problem is that mergers and acquisitions today are primarily pushed for the wrong reasons and by the wrong people, usually in their own interests, and against those of the companies and their internal and external constituents.”

“Investment bankers tend to oversell the benefits in a search for fees.”

“A large percentage of M&A transactions are effected to acquire a skill set not possessed by the acquirer  better managers, sales, distribution. Those are never more effective than organic growth. Another large percentage is for product extension, and the acquirer generally doesn’t understand the profitability (or not) of the acquired business. KPMG’s study indicated that 80% of M&A transactions destroyed value  I think the percentage is coming down, but it’s still more than half.”