Getting M&A Deals Right: The Special Sauce

November 14th, 2011

OK, spoiler alert: I’m going to disappoint by not providing the “secret” to doing good deals. I just wanted to take the opportunity to highlight a typical popular press article offering such snake oil.

Exhibit A: A recent Forbes article suggests that mergers and acquisitions (M&A) create shareholder value when they are done at the right price, with the right vision, and with proper planning (see Do Mergers and Acquisitions Enhance or Destroy Shareholder Value).

[Does M&A] enhance or destroy shareholder value? It depends on how the M&A is planned and executed. M&A that begin with the right vision and executed at the right price enhance shareholder value.

Awesome! That’s really insightful. Now can you please tell me what you mean by right price, right vision, and proper planning?? Oh wait, never mind, that information is in there too, …and with specific examples:

Oracle’s and IBM’s string of software acquisitions that have allowed the two companies to ride the rising demand for enterprise software is a case in point—both Oracle and IBM have [sic] rewarded handsomely their stockholders.

By contrast, M&A that begin with the wrong vision and executed at the wrong price destroy shareholder value. Cisco Systems wave of acquisitions in the late 1990s is a case in point. Over the period 1993-2000, Cisco acquired seventy companies, including Cresendo Communications (1993), Newport Systems Solutions (1994), Network Translation (1995), Netsys Technologies (1996), Net Speed (1998), and Growth Networks (1999), etc. The problem with this strategy, however, is that Cisco [sic] end up paying top prices for Net Speed and Growth Networks acquired at the peak of the high-tech bubble.

Get it? Got it? Good.

Wait. Come again??? It seems to me that the author arbitrarily picks cases that match his thesis. This is a scientific no-no. It’s called “sampling on the dependent variable” – choosing among outcomes that are consistent with a particular viewpoint without identifying potentially disconfirming counterfactuals. Not only that, but he doesn’t, at any point, mention execution prices, premiums paid, synergies identified, and/or anything about the due diligence processes. So in addition to sampling on the dependent variable, none of the data presented can speak to whether these deals were planned, executed, and/or priced well.

But wait, there’s a really profound take-away:

“The bottom line: M&A do not always deliver what they promise to stockholders, especially if they are pursued without a clear vision [sic] at a too high price.”

Again, not much useful there. All I really learned is that the article is in significant need of editing.

That aside, what we do know from research is that most deals fail – an overwhelming number of deals fail to create value for shareholders (see Great Shareholder Ripoff, Why M&A Deals Go Bad, The Deal that Worked). If doing M&A deals were as simple as the author makes it seem, everyone would get it right. And in the end, these kinds of articles bum me out because they are based on conjecture, not science.

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