Why acquisitions don’t work

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.

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