BusinessCorporate FinanceWhy acquisitions don’t work

Why acquisitions don't work

We all know the statistics - two in three acquisitions fail. But what does this mean?

It is usually a consultancy that carries out the study. And the solution is simple – if you use KpriceToucheAndersen&Young to plan and implementyour integration programme then success, and probably a knighthood, are guaranteed.

There is of course much truth in this. But I believe the problem is worse than that. With my normal amount of research before making a sweeping statement, I’d say that 90% or more of acquisitions fail because they are designed to fail.

Fail to deliver value that is.

While it is undeniably true that acquisitions usually fail in the integration process most could never have created value anyway because the acquirer paid too much. Although deals are usually value destroying, the myth persists that only acquisitions can create value. It’s not as though we’re short of safeguards. The FD can say no because the IRR is less than WACC.

I’ve looked at dozens and most made no sense on these grounds. Non-execs are supposed to be the grey heads who should know better. Arguably their mainfunction in life is rejecting value destroying deals.

Institutions have to vote but they have a problem – you either sack or support the CEO – so they just sell the shares if they don’t fancy it. An acquisition is only a big capex project but we are not confident enough to us CAPM to appraise them.

We need to change the system.

The shareholders’ circular ought to give the justification that the NPV of the acquisition is positive. If we did this most deals would not take place. The only ones would be those few where there was genuine synergy or where management was really incompetent. Premia would drop from the present 30%of market capitalisation because there would be less pressure to buy.

Huge energy would be diverted to proper value creation from internal development. Mind you, a career in merchant banking wouldn’t be as much fun.

  • Neil Chisman is a director of several companies, a member of the Financial Reporting Council and a former finance director of Stakis and Thorn.
    neil@chisman1.demon.co.uk

Related Articles

Grant Thornton recruits new corporate finance partner

Accounting Firms Grant Thornton recruits new corporate finance partner

9m Emma Smith, Managing Editor
Total fraud value at £2bn five-year high, finds BDO

Accounting Firms Total fraud value at £2bn five-year high, finds BDO

9m Stephanie Wix, Writer
MHA MacIntyre Hudson appoints corporate finance director

Accounting Firms MHA MacIntyre Hudson appoints corporate finance director

9m Stephanie Wix, Writer
Tax avoidance crackdown sees 80% jump in additional HMRC revenue

Accounting Firms Tax avoidance crackdown sees 80% jump in additional HMRC revenue

9m Stephanie Wix, Writer
Making Tax Digital: the "unexpected item in the bagging area"

Accounting Standards Making Tax Digital: the "unexpected item in the bagging area"

9m Stephanie Wix, Writer
Tyrie on Finance Bill 2017: ‘Making Tax Policy Better’

Consulting Tyrie on Finance Bill 2017: ‘Making Tax Policy Better’

9m Stephanie Wix, Writer
KPMG announces senior partner promotion in Newcastle

Accounting Firms KPMG announces senior partner promotion in Newcastle

9m Stephanie Wix, Writer
Independent city firm reports 70% growth

Accounting Firms Independent city firm reports 70% growth

9m Stephanie Wix, Writer