Strategy: Four reasons most acquisitions fail

By MelissaSchilling | Updated: Oct. 25, 2024, 10:51 a.m.

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Most acquisitions fail to create value. and many destroy massive amounts of value. This short video explains the top four reasons most acquisitions fail to create value and provides tips to avoid making these mistakes.

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STRATEGIC MANAGEMENT
PROFESSOR MELISSA A. SCHILLING

A considerable body of research shows that most acquisitions fail to create value
Reason #1
It's much easier to overpay than to underpay
Whether you're negotiating with the owner of a privately-held firm or you're trying to buy a majority share of the stock of a publicly-held firm the odds are stacked against you. 
Reason #1
It's much easier to overpay than to underpay
The owner of a privately-held firm  knows far more about the firm's resources and prospects than you do.
?
Buyer
Seller
Reason #1
It's much easier to overpay than to underpay
When you try to buy a majority share of the stock of a publicly-held firm, you bid the price up well over the pre-acquisition price.

Either way, you are almost always going to pay more - often significantly more - than the firm is currently worth. If you didn't, the target's current owners wouldn't sell.  
Reason #2
Hubris 
Managers of acquiring firms often overestimate their ability to manage, improve, or assess the prospects of the target firm.

Pro Tip: If the source of value sounds fluffy, walk away quickly!

"The merger will create unprecedented and instantaneous access to every form of media and to unleash immense possibilities for economic growth, human understanding and creative expression.” 
Steve Case, CEO of AOL at time of merger
Gerald Levin, CEO of Time Warner at time of merger
Destroyed $99 Billion Dollars!
Reason #3
Agency Problems
Sometimes managers want acquisitions for reasons that have nothing to do with shareholder value
Bigger! (more pay & power)
More diversified! (less personal risk)
Personal consumption! ("Let's buy a baseball team!")
Sexier! (more visibility and outside benefits)
transformed a French water and waste management company (that was a profitable cash cow for fixed income investors) into an extremely risky media company (Vivendi). 
Jean Marie-Messier
...and then went to jail for misuse of funds.
Empire Building
Reason #4
Execution Problems
Sometimes it's hard to harvest the potential value of an acquisition because it requires painful changes or because the cultures of the companies clash 
Tips
Make sure the value you are seeking from the acquisition is specific, quantifiable and feasible.
Invest in serious pre-acquisition diligence and consider worst-case scenarios.
Recognize that the people currently running the company probably know the firm and industry better than you do.
Get commitments from stakeholders to the changes you will need to harvest the value from the acquisition in advance.
Compare that value to the costs of the acquisition, including the opportunity cost of using the money otherwise. 
 STRATEGIC
MANAGEMENT

PROFESSOR MELISSA A. SCHILLING

Strategy: Four reasons most acquisitions fail

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