Acquisitions – Myths &

Reality

By
Matale Ganesh Ashok
PGP/0018/04
Acquisitions- Myths and Reality is an article prepared by Philippe C.
Haspeslagh and David b. Jemison. Various factors contribute to acquisition
performance; a study of variety of recurring patterns in the acquisition process
offers clues about the disappointing results. By considering how this process
affects the results, myths about acquisitions can be busted and we can gain
insights into ways to the control negative outcomes.
Six observations given in this article are as follows:
1. Acquisitions don’t succeed... acquisitive strategies do
2. Shareholders are the least important constituency
3. Managers try to capture rather than create value
4. Strategic analysis plays only a small role in successful acquisition
strategies
5. Nothing can be said or learned about acquisitions in general
6. Companies do not learn all they could from their mistakes

1. Acquisitions don’t succeed... acquisitive strategies do

Many managers see acquisitions as ends in themselves, not as means to an end.
Most of the executives long ago abandoned the practice of judging capital
investments solely on a project-by-project basis. Typically, each project is seen
in the context of its contribution to the firm’s overall strategy. Acquisitions,
though, are still often considered in isolation from that strategy. So in other
words, what defines the success of an acquisition is not the acquisition itself, but
the acquisitive development strategy that underlies it.

2. Shareholders are the least important constituency

Most management literature implies that shareholders are the most important
constituency in an acquisition with the key objective to maximize shareholders
wealth. Yet evidence from financial economists indicates that value is created
only for the shareholders of the acquired firm and not for the acquiring firm.
Compared with managers, employees, executives, lawyers, investment bankers,
commercial bankers and consultants have influence, and are most affected.
Furthermore indirect constituents- the suppliers, communities all have stake in
the outcome of the acquisition. This does not imply that those more directly
involved in acquisition decision neglect the interest of the shareholders rather
than personal interest of those involved are foremost in their minds and that these
interest are not always in line with those of shareholders.
3. Managers try to capture rather than create value
Managers try to capture value at the time of the transaction rather than create
value after the acquisition. Economic value creation is a long-term phenomenon
that directly results from managerial actions. Creating value is a difficult and
uncertain process. The expected synergies serve foremost to gain support from
various groups: they rarely represent a realistic appraisal. Short term benefits are
more clearly visible during acquisitions. They have to shift their focus to long
term development strategy.

4. Strategic analysis plays only a small role in successful acquisition

strategies
Three factors affecting acquisition success:
A) The process itself contains impediments to ultimate acquisition success.
Diversity of people involved, time pressures, and working in isolation leads to
divergent, unintegrated perspectives. Harbour personal agendas & goals. Severe
time & secrecy pressures. Technical, legal, and financial perspectives to dominate
negotiations, thereby driving out strategic analysis. Ambiguity during
negotiations is endorsed by both the parties. Dissimilar interest & pressure to
reach an agreement.
B) Value creation takes place only after the agreement. After the initial flurry of
activity, effort, analysis, and communication subsides, senior management tends
to move on to other activities. Fully dependent on the quality of integration and
post-acquisition management
C) The acquisition process often destroys more value than it creates. It is
important to recognize the distinction between economic and noneconomic value.
Acquisitions often destroy noneconomic value. Noneconomic value represents
nonmonetary benefits that accrue to other constituencies in the acquisition. The
human cost of acquisitions tends to be very high

5. Nothing can be said or learned about acquisitions in general

Reasons and chances for success vary with different types of acquisitions as well
as synergies. Also degree of interdependence plays a vital role.
Below are the different types of acquisition and synergy which affect the success
of a merger:
 (1) The type of acquisition
A) Defensive or Offensive motive
B) Corporate or Divisional management
C) Diversification or Integration
D) Competence or new Platform
(2) The type of synergy
Different synergies correspond to different types of benefits as well as to different
sources of problems.
The four sources of benefits are
A) Resource sharing
B) Functional Skill transfer
C) Financial Transfer
D) Strategic Logic
(3) The degree of interdependence
Decision involves a trade-off between the benefits of integration and the benefits
of autonomy. Trade-off depends not only on the relatedness and nature of the
businesses but also on the acquiring firm’s management approach and its ability
to integrate the two firms. The main reason seems to be that the benefits offering
the greatest potential in theory are also more difficult to implement in practice.
Resource sharing, for example, implies rationalizing and disposing of assets.
This, in turn, implies the destruction of noneconomic value. In contrast, the
limited profits of financial transfer require less contact among parts of the firms
and may be more easily understood. Analysts hardly consider implementation
problems before the acquisition. As an alternative, they have a tendency to justify
acquisitions by adding up profits they can easily observe.

6. Companies do not learn all they could from their mistakes

Companies can learn general lessons from acquisition activities also company-
specific factors that impede success. Many operating executives who will manage
post-merger integration are not included in the analytical process, firms forgo the
best way to provide continuity in a given acquisition. In the firm’s next
acquisition, few managers with previous hands-on experience are likely to be on
the team. Thus, the same mistakes are made repeatedly. Although many firms
have put together in-house acquisition teams, these teams serve more to provide
technical, legal, financial, and negotiating support than to accumulate broad-
based acquisition experience.

Conclusion
In reality acquisition by itself cannot offer immediate and sweeping solutions to
a firm’s problems of strategic redirection and renewal. It should into
consideration the specific circumstances of both the parent and target firms.
(Tradeoff between involvement & autonomy), (Excessive opportunism &
managerial hubris). Acquisitions are essentially driven by managerial motives
and never benefit the acquiring firm’s shareholders. This is arrived after
observing the immediate impact of an acquisition event on a firm’s stock’s price,
conclude that there is little or no positive impact on the acquiring firm’s
shareholders. The real payoff comes from the value creation process that often
takes several years to unfold. Acquisitions often present unique corporate
development opportunities, of which the scope or time frame can neither be
entirely predicted beforehand nor replicated through internal development alone.