Anecdotal evidence suggests that 80% of all Corporate Mergers and Acquisitions do not achieve their objective and most actually result in a decline in the value of the Acquiring Company. Yet seldom if ever are there consequences for the proponents of the Acquisition. Why is there this strange state of affairs?

The latest victim of this malaise is that of Brian Joffe at Bidvest. It has now been admitted that Bidvest will have to write down its recent acquisition of Adcock Ingram by a huge R1 billion. How could somebody as astute as Brian Joffe have got the sums so wrong? What happened to the due diligence and possibly more importantly, the synergies and savings anticipated to be generated by the acquisition?

Brian Joffe

Firstly before such considerations are unpacked, why do such mega-acquisitions arise in the first place? I contend that in many instances, they arise due to vanity: nothing more and nothing less. The position of being CEO is creates a curious kind of limbo. Their minions are responsible for the day to day management of the operations and unless the CEO interferes in his subordinates’ patch, he is faced with the prospect of himself acting in a chairman role without anything substantial on his plate.

The one way in which he can prove his worth is by sponsoring some novel projects such as a new product, establishing in a new region or if he has itchy fingers or possibly a legacy fantasy then he will embark upon that most fraught of adventures: a major investment.

Of course the ostensible reason advanced will never pertain to vanity, legacies or megalomania, but rather the synergies or cost savings which only this acquisition will be able to unlock

In retrospect, if I review the raft of acquisitions of my previous company over a 15 year period, how would I rate them with hindsight?

In a number of instances, I assisted with aspects of the due diligence or the evaluation of the synergies and the potential savings to be generated.

A number of observations can be made about why most never achieved their potential. I refer to them as The Sins of Acquisitions.

A Cardinal Sin is that of ethos and culture. Many of these acquisitions were of entrepreneurial organisations where the driving force was a particular forceful individual. On being swallowed by the corporate, the previously unrestrained entrepreneur is rapidly overwhelmed by the corporate gymnastics, hoops and impediments that are placed in their path.

Culture to most of us is a nebulous concept but at its most basic is really no more than how things are done in an organisation. In this case, it is the acquired company which has to adapt its culture to that of its new parent which soon antagonises the novices. Instead of the reasons for their success being filtered through to the new owners, it is the converse situation where they have to conform to arrogant suggestions of their new masters.

An elegant example of this is when General Motors acquired EDS – Electronic Data Systems – from Ross Perot in 1984. One of the underlying motives for this acquisition was as an enabler to General Motors becoming more agile. What was the end result? EDS became more like a GM dinosaur.

Many of the envisaged savings are predicated upon amending the prevailing Business Model. What is not factored in is that fact the proposed Business Model requires a different skill set which is not available within the business currently. Instructions to one’s subordinates to become more customer-centric or entrepreneurial will never be sufficient to change a Company’s Business Model. To extract the savings requires concrete plans and hard targets with the “importation” of the required skills to enable the change to be made.

A classic example of this failure is when a manufacturer of an item decides to market its product directly to the public instead of through an intermediary.

An example of such divergent Business Models was the purchase of Chrysler in the USA by Mercedes. Would a process of osmosis or diffusion ever make Chrysler a superior product? Even the distance between the two plants would mitigate against the transfer of the essence of Mercedes’ business model.

Often it is difficult to blame a poor due diligence for these unwise decisions. Is an outsider able to grasp the hidden flaws in the valuation? Innumerable examples such as pollution damage, unsustainable revenue streams and the like only surface long after the deal is concluded.

Coming back to the original question posed, why is no action taken against the sponsor of such flawed decisions? In most cases, the antagonists never voiced their opposition vociferously enough. They might have whispered their opposition in passing to their colleagues but when it came to the crunch, they themselves voted for the acquisition.

By voting for the acquisition, it makes the whole Board of Directors prima facie culpable.

Hence a culture of silence prevails when things go pear-shaped.