Posted on Monday, August 18, 2008
While our whole premise for this blog and the book that spawned it is that too few people try to learn lessons from failure, there are a few books that have looked at specific kinds of failure and teased out the lessons. Some of these books are well worth reading. We’ll highlight some in this blog, beginning today with “Deals From Hell: M&A Lessons That Rise Above the Ashes.” It was published in 2005 by Robert Bruner, whose work we cite in our book because of a detailed analysis he did that showed that the leveraged buyout of Revco Drug Stores in 1986 could have been seen ahead of time as a deal likely to fail.
The most interesting claim in the book is that acquisitions aren’t nearly as bad an idea as conventional wisdom suggests. Bruner acknowledges all the research showing that two-thirds of purchases reduce the market value of the acquirer, research that is usually treated as definitive. But he says the research is too narrow. He says researchers focus on purchases of publicly traded companies and ignore acquisitions of privately held businesses, deals that have a far greater success rate. When you look at public and private companies together, he says, “investments through acquisitions pay about as well as other forms of corporate investment. The mass of research suggests that, on average, buyers earn a reasonable return relative to their risks. M&A is no money pump. But neither is it a loser’s game.”
Bruner also argues that the focus on the failure rate lumps all companies together and fails to explore the more interesting question: What deals are likely to work, and which are likely to fail? He says:
–“In the best deals, buyers acquire targets in industrially related areas. In the worst deals, targets are in areas that are more distant.”
–“In successful deals, buyers acquire from strength—the performance attributes of buyers are stronger than their targets, suggesting that in good deals the buyer brings something important to the success of Newco.”
–“The worst deals have a propensity to occur in ‘hot’ market conditions,” such as the Internet bubble.
–“Better deals are associated with payment by cash and earnout schemes and the use of specialized deal terms. The worst deals are associated with payment by stock.”
To turn parochial for a moment, we’ll single out one final point, because it underscores the potentially enormous value of our efforts to help executives see that a strategy is misguided and to assist them in heading it off before it can be implemented. Bruner’s point is that mergers and acquisitions have acquired such a bad name partly because a small number of deals fail so spectacularly that they drag down the average results for M&A. He cites a study of 12,023 deals, in which the majority of losses were concentrated in just 87. He says the 87 occurred primarily in the hot M&A market of 1998-2001. So, he says, if businesses can avoid getting carried along by hot markets—the whole focus of our Devil’s Advocate process— and can eliminate even a modest number of the really bad deals like AOL-Time Warner, then “one reaches a very different conclusion about the profitability of M&A.”