Wednesday, September 03, 2008

Buyer's hubris harms revenue growth from acquisitions

Accenture recently released a report entitled “Leveraging Sales & Marketing to Maximize the Value of Mergers and Acquisitions.” This report quantifies what many people have felt about M&A—as far as growing revenue long-term, it’s not a successful strategy. Among Accenture’s findings was that while 56% of companies studied grew faster than their industry groups in the two years before they made a large acquisition, only 33% duplicated that feat in the two years following the year the deal closed.

The report lays out reasons this is so: disruption to customers, loss of key customer-facing staff, unexploited opportunities to market to new customers. (They also provide suggested remedies—they are consultants, after all.)

After living through three significant acquisitions (being bought twice, buying once), I believe there is a deeper reason that drives what Accenture observed—buyer’s hubris.

In spite of rhetoric like “merger of equals,” “best of breed,” and so on, in my experience buyers develop a mindset that they are superior to the company they purchased—smarter, with better products, processes, etc. (Otherwise, perhaps the shoe would be on the other foot!) This is especially true when the merger consolidates the businesses of two once-competing companies.

I recall pleading with one acquirer to retain the name of our company’s flagship product—it had brand value and keeping it would signal to the large customer base that the product itself wouldn’t be retired. At first, the integrated marketing group (led by the buyer’s VP of marketing) thought this was a crazy idea. But, after much discussion, the group reluctantly agreed. That acquiring company no longer exists, but the product—with that old name—lives on and supports many of those same customers.

Buyer’s hubris extends to the acquired company’s customers. Rather than being carefully cultivated, they are frequently taken for granted. (What they need is to be resold on the new company. This is rarely done, in my observation.)
Similarly, the people who support those customers are seen as suspect. Those people may have competed—in some cases, successfully—against the buyer’s sales team. (Perhaps sour grapes is a reason the customers are not treated as carefully as need be.) At any rate, it’s difficult to trust former competitors. As a result, they are not welcomed; their opinions are not solicited.

When consolidating a market, real humility on the buyer’s part is required. There’s a lot of human nature obstructing that, and perhaps it’s unrealistic to think hubris can be overcome. Until that day, however, we’ll continue to read studies documenting poor growth results from mergers.

(Thanks to New York Times Dealbook for the pointer to this research.)

Related posts:
Ultra-competitive mindset costs dealmakers

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4 comments:

JW said...

What we've seen is that the most successful deals are very transformative for both the parent company and the acquisition.

A rigid strategy of forcing the parent's operating model onto the acquisition without analysis of the relative strengths and weaknesses of each functional area usually results in failure to achieve the desired goals of the deal.

Andrew Meyer said...

John,

don't you think this is sort of the nature of the beast? Rarely are there mergers, most of the time there are acquisitions. Why are they acquisition? Because, because the person selling the company (the acquired company) wants to cash out. Fundamentally, they want to swap equity for cash.

So what do they do? In the two years or so prior to the acquisition, they do everything they can to look good. Lower expenses, not take so many bonuses, increase sales, whatever they can to make themselves look as good to buyers as they can so that their equity is more valuable.

The year or so after they've been purchased, there's a bit of a hangover. Some sales from the future were made prior to the sale. People who had employment contracts or vesting periods also had a lot of security to go back and get degrees, change their skills, experiment in new areas, whatever.

The buyers know this. If they are sophisticated, they are looking at longer term benefits or the opportunity to work with certain people or the opportunity to explore new areas, consolidate markets etc. Isn't it natural?

How much do you learn about your spouse after the wedding?

John Caddell said...

Andy, all the things you talk about do happen. But I'm talking about something else. An acquirer does strong due diligence. They know their target, what it's worth, what skeletons are in the closet etc. They make some allowances for bad news they don't know yet.

In spite of this, they self-sabotage. It's pathological. They treat the acquired employees, products, processes, customers with suspicion. They don't engage. They don't share. They don't cultivate. As a result they achieve less than they should.

It's subtle, under the surface. But it exists. I've seen it twice when I was with a purchased company. When we purchased another company, I tried to guard against this behavior in myself, but I don't know how successful I was.

Andrew Meyer said...

John,

thanks, you reminded me of a very interesting conversation I had prior to my blogging days. (BB-Before Blogging???)

The discussion revolved around alignment of business strategies, capabilities (IT and Business) and business models.

If these are misunderstood in the acquiring company, the target company, which has different strategies, capabilities and business models, often accentuates what we called an air pocket.

Just like you can have an air pocket under a freeway and the freeway will be just fine for awhile, when it caves in, it will be disastrous.

Similarly, if there are air pockets between company's strategies, capabilities and business models, when they collapse the result is disastrous.

Thanks for reminding me. And as they're not playing the Packers, I hope the Steelers do well...