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I have been blessed, or cursed, to have been involved in turning around two separate acquisitions gone bad in my career.
One turn-around would fulfill any sadist’s desire for pain, but two, that’s just not right! In both cases, the opening conversation went like this. “Welcome, you have less than a year to get this business on track or we will shut the doors and you and this rag-tag group will go the way of the Dodo.” Okay, I’m ad libbing a bit, but by the time I got involved, the promises of the acquisition, the hope and joy, (with the party with balloons and speeches), had long faded. The original executive team had already been fired, moral was low, and the deal was losing money, customers, and all hope.
Why do so many acquisitions go this route? There are very few success stories and many, many stories of abject failure. Because I’ve lived through a couple of these cases and studied many more, I’ve come up with a few reasons why things go so wrong. In a tongue-in-cheek way, I’ve named the main reasons RRBA, “Robert’s Rules of Bad Acquisitions”. The main rule is as follows:
RRBA 1: The acquiring company assumes superiority
I’ve seen this rule played out in many of the cases I’ve studied. This happens when the acquiring company assumes that since they had more cash, or success, or were bigger, that somehow they must be smarter, better, and certainly better looking that the poor “losers” they just bought. The chief executives may not share this sentiment, but just one level down, the victors plan to consume the victims of the deal. In both companies I was involved with, the CEO’s were both optimistic, were excited about the deal, put their reputation on the deal, and were fired because of the deal. By the time they were replaced, the once merger-of-the-century was teetering on collapse. It wasn’t necessarily the fault of the Chief Executive Officer, but RRBA 1 was fatal to the CEO and almost destroyed multimillion dollars in value.
Because the acquiring company calls the shots, they sometimes fail to see the value in the talent they just bought. A rational company would take stock in the total workforce, evaluate the total combined employees, and pick the very best from both companies. What I found, however, is the acquiring company rarely sides with the acquired because the assumption is they, frankly, are just better. This arrogance can be fatal. I personally have experienced this and it’s astounding. Then there were the times when we got visits from the acquiring company executives without getting the lay of the land. Rather than listening to the team at the acquired firm, once again the assumption of RRBA 1, they would instruct us and then leave. There was very little two-way dialogue and too much bloviating. It was hard to keep my eyes from rolling all the way in their sockets. Poor decisions were made and the deal suffered.
The other key failure was the urgent need to have “efficiencies” soon after the deal. The term “efficiencies” mean the elimination of over-lapping positions in the acquired company. This should be avoided until a full and complete assessment of total talent of the acquired and acquiring companies, and the assumption should not be that all cuts come from the company acquired. On both of my experiences we eventually lost Human Resources, most of Accounting, Facilities, some of R&D, some Quality and Regulatory, and most importantly, Marketing and a good amount of the Sales team. The virtual elimination of the Marketing and Sales teams in the acquired companies proved almost fatal and amounted to the majority of the issues and losses in the deal. This issue is so important, I will dig deeper on this topic next month.
Another element of the “efficiencies” activity is that if the deal required an elimination of headcount to make the acquisition financially viable, do not do the deal. There are too many variables in the acquisition to rely on layoffs to make the purchase viable. Often the Due Diligence is sloppy and they don’t get the best intelligence and detail to fully understand the variables of the deal.
There is a virus that the leadership team gets in the due diligence process in that they fall in love with the possibility of the deal and then, little by little, an euphoric disease hits the decision makers and the justification plan becomes one of hope and glee. In both of my experiences, the financial justification was far too optimistic and because they stripped the very people that made the original company successful, the acquired company was injured and unable to deliver on their original plan, much less on the accelerated growth guaranteed in the justification. Here again, RRBA 1, was in effect. Because the acquiring company assumes superiority, they think their team can outperform or have the same performance, and often higher performance, than the original company and that is almost always fatal. Again, if the acquiring company cannot justify the deal without “efficiencies” and an accelerated growth curve, they should not proceed.
So in summary, if you want your next acquisition to be more successful, do not assume that your firm has all the answers, has better ideas, and better people. Be very conservative in the justification and be very thorough in the Due Diligence process, and be ready to walk away from the deal, even if you have the “got to buy them” disease. In next month’s discussion, I’ll focus on the single largest issue, in my experiences, on why acquisitions often fail. By the way, both acquisitions did survive, gained in share, and improved gross margins and profit, but fell short of the justification plan – Lesson learned.