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Avoiding The M&A Failure Trap: Q&A With NYU’s Baruch Lev And SUNY Buffalo’s Feng Gu
- According to Baruch Lev and Feng Gu, who recently published The M&A Failure Trap, the frequency of write-offs of goodwill and investments in acquisitions, the rise of conglomerate mergers and price spikes are part of a troublesome trend in M&A. They estimate that 70%-75% of acquisitions have a disappointing completion rate, and found that company CEOs are often overconfident and frequently make multiple acquisitions believing that, following the takeovers, they'll be able to create major successes from what were think were loser targets. Poor management incentives and failure to communicate well with employees before, during and after acquisitions also hamper likelihood of a successful merger. The authors call for use of a newly-designed acquisition scorecard to help acquirers better judge the likelihood of success.
- Baruch Lev and Feng Gu recently published The M&A Failure Trap warning that today's high-frequency of write-offs of goodwill and investments in acquisitions, the abundance of conglomerate mergers and spurts of price spikes are part of a troublesome trend in M&A.
- They found a 70-75% acquisition completion rate with disappointing outcomes and that overconfident CEOs create multiple acquisitions thinking they can turn what were losers into outright winners.
- Poor incentives for management and trouble in communication with employees before, during and after mergers were also identified as problem areas leading to poor completion rates.
- The authors were keen that companies should use a recently designed acquisition scorecard to help better identify potential success, where they estimate the 10 most important factors that either significantly positively or negatively affect acquisition outcomes.
- The ideal buyer is said to be one that looks to make acquisitions before the arrival of a crisis, such as when patents are due to expire, a plateau is reached or competition is lurking, but not necessarily a company that is incredibly successful.
- One of the authors' main focuses was on the human aspect of M&A, which they warn is often ignored; upon the acquisition announcement employees frequently start to leave, with talented staff often going first as they're more likely to find jobs elsewhere, with the trend continuing post-acquisition due to lay-offs being used as a means of cost savings.
- Guidance on what would-be acquirers can do to anticipate success or failure was also sought; the authors encourage acquirers to provde a less optimistic outlook when providing information to management, to focus on potential plans for integrating target employees and to do due diligence on the accounting to help to identify any manipulation, the lack of which can lead to write-offs and subsequent embarrassment.
- A buyer is considered to look good if it can use some of its stock for payment, rather than just cash or when it is attractive to target employees.
- Finally, the authors call on companies to change the incentives where acquisition incentives should be given only for successfully completed acquisitions.
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