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Cover Story

The Difficult game of M&As: A Practitioner’s view
M&As often only create value for The Acquired, but not for the acquirers – exactly The Opposite of what is expected. Why are M&As not so successful? The answer lies in their complexity says Prof. Pablo De Holan, Faculty of Strategy & Organisation, Incae Business School (Costa Rica). Co-Ordinated
Issue Date - 18/08/2011
M&As are tools used by firms to grow, along with corporate venturing and organic growth. Unfortunately, it is a tool that is fraught with difficulties. Indeed, research shows that M&As often only create value for the firm that is being sold, but not for the acquirers, exactly the opposite of what it is expected.

To understand why this is so, we need to explore the degree of diversification of both firms. Obviously, the more different the participating firms are at the onset, the more complicated the integration process is, and as a consequence, the higher the chances to make costly mistakes that have the potential to reduce, often in a significant way, the value created by the M&A. This is so because the cost of the acquisition is set early on and can only increase, but the value generated will only happen after the integration process begins. In addition, it is not uncommon to see firms exaggerating the potential of the M&A to justify the acquisition, only to find that these inflated expectations cannot be fulfilled easily.

Rather than focusing on the difficulties of M&As, it is important we understand under what conditions they create value for the acquirer. While research shows that highly diversified firms tend to have lower returns than highly concentrated ones, the causal relation is unclear. Recent research shows that the lower returns can be explained by the fact that firms often embark in a diversification campaign (through M&A, for example) when their results in their core business are declining or are expecting to decline. M&As, then, are seen as a remedy to a bad strategic position rather than a way to consolidate it. This is particularly detrimental to firms because in M&A, as in many other situations in life, one can buy only what is up for sale or pay a huge premium to convince someone to sell something he was not willing to sell, increasing the risk of overpaying for the acquisition.

Some interesting ideas emerge from these findings. First, managers need to understand the importance of thinking about M&As as key strategic tools, and wonder how (or whether) M&As fit or don’t fit into their current strategy. Second, managers should remember that M&As can support and sustain a strategy of diversification, but will not easily replace declines in their core markets. To expect M&As to be the short-term, quick-fix solution to competitive weaknesses is to ask too much of this tool, and disappointment is almost guaranteed by design. Well applied, M&As and diversification in general can add a great deal of value to a company, but only if we understand the dynamics of acquisitions and their cycle, which may or may not correspond to the company needs at that time. Also, managers need to avoid underestimating the difficulties of integrating different companies. This is somehow counter-intuitive, as very different firms can look complementary and thus show great potential ex-ante if the integration goes well, while more similar firms, whose integration would be simpler do not look as promising. Finally, managers need to keep in mind that firms who have built a successful strategy of growth through M&As, have done so by conducting extensive due diligence exercises, which obviously include the financial aspects of the M&A and integration of the company once the M&A has been completed. As it is the case with many other dimensions of life, in M&As, “chance favours the prepared mind”, so a little preparation of the integration process can go a long way to avoid issues later on.

Conclusion is: M&As can produce outstanding results when used properly. However, as it is the case with any tool, the context in which they are used, and their applications, vary a lot from one situation to the other, requiring managers to spend time thinking whether the tool being used is adequate for the circumstance and whether it fits with the strategic objectives, or not. Research shows that M&As are complex tools, but experience shows that with adequate planning, the results can be quite positive.
Anirudh Raheja           

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