The Acquisition Failure Myth
It is a familiar refrain that most acquisitions fail. And it’s so easy to jump on the speculative bandwagon of skeptics who sneer at the announcement of almost every new acquisition, be it the latest news about Square buying Tidal (Jay-Z’s failed startup), Apple buying Next and bringing Steve Jobs back in 1996, or any other high-profile acquisition announcement for that matter.
But is it actually true that most acquisitions fail? Are serial acquirors like Google, Facebook, Apple, and others just insane — doing the same thing expecting different results — or the equivalents of a modern day Sisyphus, compelled by some divine mandate of the gods of the financial markets to push the M&A rock up the hill only to see it roll back down?
As someone who has been a student and practitioner of M&A deals, I have noticed that the actual data paints a very different picture: most acquisitions are actually successful! Yes, there are plenty of examples of colossal blunders that reinforce the popular misconception. For instance, in 2015, Microsoft wrote off 96% of the value of the handset business it acquired from Nokia for $7.9 billion the previous year and laid off 15,000 Nokia employees. In 2014, Google sold for only $2.9 billion the handset business it had acquired from Motorola for $12.5 billion two years earlier, resulting in an almost $10 billion loss of value. Which is an astounding amount of write-down unless you compare it against the ill-fated AOL Time Warner merger ($164 billion) at the height of the dotcom bubble which led to many years of write downs, hundreds of billions of dollars in losses and eventual spinoff of AOL.
And not all stories of M&A failures have been just about financial losses. Many of us are still upset about the slew of acquisitions by Yahoo of some of the most promising internet properties in early 2000’s such as Geocities, Flickr, Tumblr, which then lost their momentum and viral growth, only to be superseded by the newer platforms such as Wix, Instagram and Medium among others. Honorable mentions should also go to HP writing down $8.8 billion of its $11.1 billion Autonomy acquisition and News Corporation selling MySpace for $35 million, which it had acquired six years earlier for a whopping $580 million. These are usually the stories that most of us hear about, thanks to the media’s love affair with breaking (and regurgitating) disaster stories.
But for every one of those failure stories, there are many more success stories. While I am not denying that there have been M&A failures, I believe acquisitions in general don’t get the credit they deserve.
Starting Point: Definition of Success
To claim that something is a “failure”, we must have a good sense of what “success” means. But defining “success” in M&A is harder than it may at first appear. First, “success” for an acquiror can have quite a different meaning as compared with the target’s point of view. And “success” can also have quite different meanings for various stakeholders within each of those companies. For instance, to founders and angel investors in a startup that exits at the same valuation as its Series B round of financing, the transaction may be considered a success, whereas to Series B and later investors who do not get any return for their investment it would be a “failure.” Similarly, to employees who get to join an acquiror with comparable or better compensation packages and titles it would be a “success,” whereas to those employees whose positions are rationalized (euphemism for cost savings realized through headcount elimination), the acquisition may seems like a dismal failure. Users of a beloved application like Flickr or Tumblr that gets shut down or neglected because of an acquisition, again, would likely view the transaction as a heartbreaking failure.
When studies set out to determine the success or failure of M&A transactions, they usually focus on the acquiror perspective and try to assess whether the transaction was a net gain or net loss to the enterprise value of the acquiror within a defined time frame because of the inherent difficulties of tracking the success metrics for the target and its stakeholders post acquisition. And from the acquiror perspective, anything other than financial metrics is also quite challenging to track.
Measuring Impact on Acquirors
But even if you were to just consider the financial impact of an acquisition on the shareholders of an acquiror, how can you separate out the impact of the acquisition from the impact of all the other things that influence a business, including the composition of its team, its leadership, culture, mission, resources, products, location, competitive strategy, etc? Unlike how you could test the impact of a new feature or a different color on the “buy” button on a website, there is no A/B test you can perform on M&A transactions to truly tease out the impact of an acquisition on the acquiror’s business. Far too many factors play a role in the outcome for any business.
As you look closer, it becomes increasingly evident that judging the objective success or failure of an acquisition, even if you constrain your inquiry to purely financial metrics for the acquiror, is an impossible undertaking. I have yet to find a study that does a satisfactory job in quantifying the real impact of acquisitions on acquirors. But for every one of those, there are many more transactions that have actually gone right. And I am not just referring to the big success stories like the acquisitions of Next, Paypal, YouTube, Instagram, Zappos, or WhatsApp. I am talking about the majority of 45,000 or more acquisitions a year that take place without any notable press mention.
Proxy Metrics for Measuring Success
I take the best proxy for measuring the likelihood of success or failure of M&A transactions to be their popularity and the rate at which they occur (i.e., the chart above), giving the transacting parties the benefit of doubt that they are actually as smart as and data-driven as the rest of us, motivated by success and with perfectly valid reasons for entering into those transactions. You may even call it the Principle of Charity as applied to M&A… Even bankers deserve our empathy sometimes, don’t they?
At the end of the day, acquisitions don’t typically happen based on a whim or because one executive falls madly in love with a target. In fact, for most acquirors, inertia pours heavy buckets of ice water over any fevered deal maker. Expectations from the outcome of a transaction would have to be very high and the deal champion would have to convert many doubters to get the deal past all the various approvers. And according to surveys of acquirors, majority of them actually consider their deals to have measured up to their expectations.
To me, these data points paint the opposite picture from that of a track record of failure. Wouldn’t you agree?
(Pro tip: Deals can still go south or not happen at all. If you are an entrepreneur thinking about building a startup that could successfully exit, avoid these 5 fatal mistakes)
