Now that corporate America has largely emerged from the financial crisis and many companies’ war chests are once again overflowing, mergers and acquisitions are coming roaring back. According to Thomson Reuters, worldwide merger and acquisition activity in 2014 experienced a 47% year-over-year increase, making 2014 the strongest year for transactions since 2007. In 2015, strategic acquirers continue to be on the hunt for transactions and are demonstrating their eagerness to deploy investors’ capital. The pressure for executives to complete a deal and issue a head-turning announcement is building mightily as competitors make their move.
Despite favorable conditions and competitive dynamics, discretion is still the better part of valor. A haphazardly designed or reactionary acquisition strategy that results in closing the wrong deals or too many deals too quickly can have long-term significant adverse consequences for a company. No company, regardless of its size or prominence, is immune from the fallout that might follow a failed transaction. Even large companies with household names in the past have fallen from glory after an ill-advised merger or acquisition.
One of the earlier failures in the United States took place when New York Central merged with Pennsylvania Railroad in 1968 to form Penn Central. As a result of the merger, Penn Central became the sixth largest company in the United States, only to find itself in bankruptcy a short two years later despite the fact that it had $4.6 billion in assets. Many more casualties have followed since this time and continue to surface today.
Given the complexity associated with merging companies or integrating a target company, executives serve themselves well when they critically examine assumptions and rigorously debate a transaction strategy to ensure they acquire only those targets that are a natural fit for their companies on fair or advantageous economic terms. Following a well-designed transaction strategy will help position a company to satisfy stakeholders, raise additional cash, stay in the game and grow market share for years to come.
Here are five mistakes corporate executives should attempt to avoid when looking to take on the next deal:
(1) Focusing on acquisitions for the sake of being acquisitive. Prudent executives do not mistake activity for progress or let the noise of the marketplace dictate their next step. As the failed Penn Central merger illustrates, the wrong deal can turn on a company quickly post-closing, and the damage is difficult to reverse. Some deals make little sense because they are overpriced, based on overly optimistic post-closing projections or poor cultural fits. When this happens, the transaction may cause harm to historically performing core businesses and weigh heavily on the entire enterprise. Though dealmakers traditionally celebrate completed deals at closing dinners, these dinners actually kick-off the real, sometimes painfully difficult, integration work that a strategic acquirer needs to undertake to ensure its acquisition is operationally – and ultimately financially – successful. Because of the hard work and risks involved, executives should only pursue transactions that have sound, well-reasoned justifications.
(2) Overpaying for a target. When credit is widely available or numerous buyers are chasing fewer sellers, prices for some targets may rise. Sensible executives realize that cash is difficult to earn, but easy to spend. These executives do not become emotionally attached to potential transactions and patiently wait for the right opportunities to present themselves. As Warren Buffett once said, “Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
(3) Diverting capital to acquisition targets that core businesses desperately need. Not every company has emerged from the financial crisis in a strong enough economic position to launch an aggressive growth strategy. Nevertheless, the appetite for transactions often remains, with executives looking to divert capital from other business units to fund growth plans. This strategy has the potential to have an adverse impact on the business lines that generated strong revenue and profitability numbers historically. Signs of this mistake occur in a services business, for example, when a company fails to replace obsolete computer equipment while at the same time spends cash on unproven adventures. At its worst, this strategy can lead to fatigue in core businesses, causing once reliable revenue streams to break down.
(4) Simultaneously moving in too many directions. An acquisition strategy should not have so much built in complexity that it makes your head spin. This happens when a company acquires businesses in so many different sectors and subsectors or geographic locations that, because of its size and sophistication, it cannot possibly have the knowledge base to excel in all of them. Alternatively, a company that is chasing new deals before even beginning the serious integration process with the last deals closed runs the risk of having underperforming business units across the board. An overburdened company that has taken on too much, too quickly can suffer from culture clashes, leadership exits, disillusioned employees and failed communication strategies, among a whole host of other problems.
(5) Ignoring one of your best resources – your people at all levels in the organization. Employees have a vested interest in seeing their companies succeed. After all, their personal financial results are often closely associated with the performance of their employers. Employees are also on the front lines of the business, participating in research, development and innovation activities and interfacing with key customers, vendors and suppliers. In some instances, employees are never asked about their thoughts on a particular strategy, yet they have valuable feedback. It is wise to develop a culture that encourages employees to discuss ideas with the leadership team and engage in robust debate over strategic matters. Rather than standing back and watching employees raise their eyebrows or whisper to each other in the corner, encourage them to share their thoughts and opinions about the company’s future.
 Mergers and Acquisitions Review, Thomson Reuters, Full Year 2014, http://dmi.thomsonreuters.com/Content/Files/4Q2014_Global_MandA_Financial_Advisory_Review.pdf.
 Penn Central Transportation Company, Harv. Bus. Sch. Baker Library, http://www.library.hbs.edu/hc/lehman/company.html?company=penn_central_transportation_company (last visited Mar. 22, 2015).
 The Warren Buffett Way, John Wiley & Sons, Inc., http://www.wiley.com/WileyCDA/Section/id-817935.html (last visited Mar. 22, 2015).