Guest post by Zane Markowitz, Senior Managing Director, McLean, Markowitz & McNaughton Division of The McLean Group, LLC, McLean, VA.
“Sometimes the thrill of the chase blinds us to the realities of the catch.” – Warren Buffet
The Oracle of Omaha knows well of what he speaks. Simply put, many failed or disappointing acquisitions are competitive analysis failures. And more than a few wind up being disastrous mistakes. Extensive research indicates M&A failures and disappointments seldom result from a lack of accounting or legal due diligence.
A well-known survey asked several hundred acquirers why acquisitions failed or fell short of expectations. Respondents’ Top 10 Reasons Acquisitions Fail are provided below, and neither accounting nor legal due diligence made the list. This is interesting because acquirers spend an enormous amount of time and money on accounting and legal due diligence. Arguably, over the years, the accountants and lawyers have created a due diligence process so effective that post-transaction surprises in these areas are very rare. Which in fact should not be surprising because the accountants and lawyers are given most of the information they require to conduct their due diligence and their obligation essentially is to conclude whether or not that information is accurate and complete. Furthermore, the information they require is easily and readily available.
However, target company competitive analysis and market analysis are far more difficult to obtain and analyze. And this is where the acquisition due diligence process breaks down. Let’s take a look at the Top 10 Reasons Acquisitions Fail, below:
Top 10 Reasons Acquisitions Fail
- Target’s market growth is lower than expected
- Industry margins are less than expected
- Target’s market position is weaker than expected
- Competition is tougher than expected
- Pre-acquisition research was inadequate and inaccurate
- Target’s management is weak
- Target’s profit margins are lower than expected
- The acquired company’s systems were not as developed as expected.
- Post-acquisition capital requirements proved to be larger than expected
- Strategic planning was lacking
From Robert Spitalnic and Acquisition Horizons, “The 10 Leading Reasons for Acquisition Failure.”
Over the years, McLean, Markowitz & McNaughton has produced hundreds of M&A competitive analyses on behalf of acquirers. These studies consistently identified “Top 10” issues that, if not addressed pre-acquisition, inevitably would have led to acquisition failure. Which takes us back to Warren Buffett whose “thrill of the chase” observation recognizes that acquisitions too often take on a momentum of their own. And once that “train leaves the station,” it is very hard to slow, let alone stop as the acquirer, seller, and advisors all seek a close and a payday.
Don’t be blinded, during the chase, to the realities of the catch. Is that target as good as claimed or imagined? Is its business segment growing, attractive and sustainable? Ask the hard questions and demand well-reasoned answers. Ensure that competitive analysis due diligence plays a central role in any acquisition strategy you pursue and you likely will avoid a failed acquisition.