Why Strategic Acquisitions Fail to Enhance Shareholder Value

If you were to ask a corporate executive, “did your recent acquisition create or destroy shareholder value,” you may be surprised at their response. Recently, KPMG commissioned a global study which indicated that 69% of surveyed corporate buyers did not enhance shareholder value from acquisitions made over a 2 ½ year period.   My experiences over the years representing both buyers and sellers give me considerable insight into why some acquirers are able to enhance shareholder value, while others fail. In this article, I will focus on some of the key factors that may hurt the outcome of your transactions; however, the good news is that all of these factors can be overcome with proper planning and organization.

  • Inadequate strategic and commercial due diligence: One of the most common failures of an acquirer is to underestimate the scope of due diligence. As a strategic buyer, acquirers often feel that they have a better understanding of the Target’s market; however, a predisposition to the market can give one a false sense of confidence which can lead to trouble down the road. For example, the Target may be active in the acquirer’s boarded market, but its recent growth and future growth (which is why you bought the business in the first place) may be in a smaller sub-sector with a niche product. These sub-sectors may have different growth drivers and having a complete understanding of these drivers is critical.
  • Human resources and people issues: People are the life blood of any organization and acquirers rarely focus enough on the cultural make-up of the organization and its people. Typically, not enough time is spent evaluating the human element of due diligence. Key people issues often overlooked relate to retention, cultural differences and job security.
  • Overvaluing synergies: Too often, acquirers over-value the synergies they or the Target bring to the transaction. Over-valuing the synergies can lead to overpaying for a Target and a failure to execute the agreed upon business plan. For whatever the reason, lack of people or time, acquirers end up performing a limited scope in detailing the synergy analysis prior to deal completion.
  • Inadequate integration: Undertaking an acquisition can be a stressful and time consuming process for everyone involved. Typically, after the closing, everyone involved goes back to doing their day job and post-closing merger synergies are not implemented quickly enough. The failure to assign tracking and accountability of the integration plan can lead to poor integration down the road.
  • Inadequate M&A process and lack of formal M&A playbook: Acquisitions are complex and time consuming and the lack of a formal transaction process plan can lead to critical issues slipping through the cracks. In addition, without a guide that maps out the process, an acquirer may choose to focus on incorrect acquisition objectives and key success factors.

So where should executives focus to make sure they can increase value in a transaction?   1. Hold managers accountable for achieving the set business plan and track the integration plan and synergies. Focus on empowering the project manager and getting the relevant business unit involved early and often in the process.   2. Focus due diligence on the Target’s future growth prospects. Create an objective and detailed analysis of the synergies from a market and company perspective. If possible, get an independent board of advisors involved that may have a more objective view of the analysis. Create a standalone case to validate sales growth, cost, and cash flow assumptions.   3. Pay close attention to cultural issues at the Target and how those compare /contrast to yours. Tailor your post-acquisition strategy based on an understanding of the Target and its employees to preserve and leverage the Target’s cultural strength.   4. Formalize an acquisition process and tools to build upon past experiences. Develop an M&A playbook that can help identify and focus diligence on key value drivers and risks.   While it is not guaranteed that your acquisition will achieve 100% of your pre-closing goals, having a more organized and focused effort will help in minimizing any value erosion down the road.