Sometimes your best investments are the ones you don’t make – Donald Trump
True to the sign of the times a mobile company rang the final bell on a company that once dominated the desktop. Verizon Wireless has closed a deal to buy Yahoo’s internet business for an all cash $4.8 billion bringing an end to an era in tech history. Yahoo, once the poster boy of the tech world, the opening para in the digital history of the world, is now reduced to being a footnote in the same history. What a fall!
Two Stanford engineering students went to Yahoo in 1998 to sell at 41 million their small company which wanted to send the visitors to its site to other sites and earn money. Yahoo again walked away angrily at the price quoted by that same small company which now grow big at $5 billion. That small company was named Google! In February 2008, Microsoft offered to buy Yahoo for $44 billion, a price Yahoo felt it was too small to sell itself at. Eight years is a long time in today’s world.
It is a season of mergers and acquisitions. Yahoo’s deal comes after the great grand acquisition of LinkedIn by Microsoft for $26 billion. Two marquee companies which led the tech revolution have now been gobbled up. The question everyone asking as is always done is, will these mergers and acquisitions work? History of M&A is littered with more disasters than winners. A look at some of the M&A’s will help set the right perspective before we examine few win and most fail.
Worldwide some of the most successful M&A’s are: Disney & Pixar, Sirius and XM Radio, Exxon and Mobile. Bad ones that top the list are Benz and Chrysler, Mattel and The Learning Company and Sears & Kmart. Really, really bad one’s are Quacker & Snapple, Sprint and Nextel, AOL & Time Warner. You can read more details about these M&A’s here http://www.cnbc.com/2009/12/29/Top-10-Best-(and-Worst)-Mergers-of-All-Time.html?slide=15.
Closer home we have had our share of good, bad and ugly mergers providing rich fodder for management theory and strategy. Cases like Hindalco-Novelis, Tata-Jaguar, Mahindra & Mahindra- SCHONEWEISS were a source of pride as Indian companies bought over western companies. Back to the question why M&A’s fail?
On the face of it one company buying another to become big seems easy but isn’t. According to Harvard Business Review, between 70 to 90% of all M&A’s fail. Here are few reasons culled out from various studies:
Hubris: Quaker bought Gatorade and made it a success. Buoyed by the success, Quaker went and bought Snapple without complete study. Result a financial disaster and body blow to Quaker. Each M&A is different.
Culture: Daimler was a German company which was “conservative, efficient and safer”and Chrysler was “daring, diverse and creating”. If there is an example of culture effecting coming together of two companies this is it. The culture gap between these companies was wider, deeper and tumultuous than the Atlantic. It is something no P&L or analytic chart can map or worse predict.
Paid too much: Microsoft walked out of the proposed deal with Yahoo in 2008 when asked to pay beyond $46 billion it offered. Yahoo once walked out of deal to buy Google at $5 billion . One company on different sides of the table and both turned out to be ruinous for Yahoo. What is the right price? Your guess is as good as anyone else.
Due diligence: Hewlett-Packard acquired British software maker Autonomy for $11 billion in 2011 and ended up taking a charge of $8 billion on its balance sheet a year later. Reason, HP discovered false accounting details, fudged numbers and much more financial malfeasance on part of Autonomy ‘after’ the acquisition. Simply put, bad due diligence by HP. Closer home Diageo and United Spirits (Vijay Mallya’s company) and Global Trust Bank and UTI Bank (now Axis) merger are examples of failed due diligence.
Customers: Many pharmaceutical companies committed the mistake of making the acquisitions work rather than focusing on acquiring customers. Dissatisfied customers are easy prey for competitors.
Mergers and acquisitions are not bad and many companies have grown inorganically thanks to buying out talent and ideas. Facebook today is an amalgamation of Instagram, Whatsapp and many more small entities which added value to its core offering. Google’s big channel is YouTube which is an acquisition.
What makes an M&A a success? The search for the right formula is on and may never be found. Deal making is much a science as it is an art.