No Easy Task
This article was first published in Quantum magazine.
Acquisitions, we know from experience, take years to bed down. When the bombshell hits, they take up significant executive time as the managers of the acquirer determine new management structures and managerial positions, as well as combining business practices and systems.
For the managers of the acquired, there is an inevitable feeling that one is no longer in control—and certainly no longer the boss. There is focus on consolidation, job losses, system changes, and new ways of working. Careers can be held back, if not ruined. Worse still, morale can be adversely affected and customer relationships can be harmed.
Extracting the benefits from acquisitions can be more difficult than imagined. Shareholder value can be eroded. So why do companies acquire other companies, and do acquisitions actually succeed?
Cycles of Acquisition
There is a sort of hubris about acquisitions, which peaks when share prices peak. During an economic boom, acquisitions increase. In the United Kingdom, for example, the number and value of acquisitions peaked in 1973, 1989, 2000, and 2008, periods immediately before share prices and the economy dipped.
In times of economic growth, there is a marked tendency on the part of businessmen (as well as politicians) to imagine that the good times will go on forever. Was it not British Prime Minister Gordon Brown who, as he is often reminded, declared the end of boom and bust? So it is with boards of directors. The oil price hike in 1973 was as much of a shock to many as the bursting of the dotcom bubble in 2001 and the financial crisis of 2008.
The story goes something like this. Economic growth looks set to continue. Share prices are high. Commentators, analysts, and, certainly, fund managers are looking for even higher returns. And chief executives want to become the largest (and therefore, supposedly, the most successful) in their industry. To do this organically takes time—and the market does not have time. Thus, growth by acquisition is enormously attractive. There are targets out there, but not necessarily complete information about the likely prospects.
The adverse consequences of acquisitions made at times of economic growth have, typically, been masked by the fall in revenues and profits in the ensuing economic downturn. Poor performance after an acquisition has often been blamed on the economic climate rather than on the failure of the acquisition to match expectations.
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