the art of the deal
With over a trillion dollars being spanked on mergers & acquisitions in the first quarter alone, 2018 is shaping-up as a helluva year for deal makers the world over. And with the recent Clydesdale & Yorkshire Bank’s swallowing of Branson’s Virgin Money, the pace shows no sign of abating anytime soon. Having once sold a bit of a company, before then seeing it flogged to a US organization, I know first-hand that such deals always make sense. On paper at least. However, the old adage that mergers are made in heaven and lived in hell, often seems more pertinent.
The rationale for the deal is undeniable: economies of scale, revenue increase with efficiency savings (aka cost-cutting), complementary product range, a boost to sales, opening-up new audiences, removing a nuisance competitor, acquisition of great staff et al. Mind, just one problem though. Dependent upon the measurement metrics you choose, anything from 50-80% of the deals, fail. My own definition of any supposed synergy used to be ‘this makes no commercial sense whatsoever but please God something good may come out of it’. Two plus two equals three. If you’re lucky.
One of the key reasons for an acquisition or merger remains the ego of the aggressor. Someone has done the hard yards to make this happen, and happen it’s going to, as their reputation and future glory depends on it. But bringing two disparate companies together is difficult at best and even the most diligent due-diligence can’t be expected to uncover all the proverbial skeletons in the cupboard. Everything from Internal systems and processes, non-compatible & diverging tech, differing management style and company culture, to downright malice, mistrust and resentment, all muddy the acquisition water.
A further factor is that when markets are flying high, and money is cheap and available, the case for the takeover is easy to make. Factor in FOMO (fear of missing out) and company managements make exactly the same mistakes the rest of us appear to do with our personal punts – we buy too high and pay too much. Companies are bought when everyone is upbeat and positive, when prices are high and the cyclical business environment on the rise. The acquisition I referred to earlier is perhaps the perfect example of this as all parties were bull-ish in the extreme and almost all possible positives could be applied with gay abandon. Two years down the line I think only one employee remained in position and, with the client base decimated, goodwill was in tatters and no-one considered it a good deal. M&A deals founder on the rocks of ill-founded optimism and any possible synergy needs to be taken with Lot’s pillar of salt!