Over-eating or bingeing is detrimental to one’s health. Similarly, over-acquisition can
cause corporate indigestion such as over-leveraging, integration difficulties, cultural
misfits etc. You are what you eat.

While fast growth through acquisition is a thrilling experience in running businesses, it
also holds much more risks than meets the eye. When the company is in trouble, some
CEOs also go on a shopping spree - acquisition. It is more glamorous and exciting than
trying to fix mundane turnaround issues back in the office. It takes shareholders’
attention away from the domestic problems and impressed them with expansionary
programs. Rapid acquisition done in haste with inadequate homework, wrong timing,
egoistic reasons and impatience for success can result in calamity.

Harvard don, Michael Porter studied the success rate of 33 highly regarded companies
over a 36-year period of acquisition. His data revealed that over half of the ‘unrelated’
acquisitions were later divested. Research by McKinsey & Company found a failure rate
of 61% in acquisition programmes, with failure defined as not earning a sufficient return
on the funds invested. Sometimes these failures are due to the fact that the acquisition
was a mismatch in the first place, with small odds for success.

A high percentage of merger difficulties and failures are the result of defective management. Target companies are strategically sought and stalked, but then the follow-up acts are poorly orchestrated.
Often people in both firms will be seriously troubled about how the acquisition may affect their personal careers. A good part of the merger/acquisition planning should be aimed at deciding how these concerns will be addressed. For instance, Novell’s merger with WordPerfect caused people in both organizations to experience dismay and the combined company teetered subsequently on the brink of disaster.

After buying WordPerfect for US$855 million, Novell sold it to Corel less than two years later for only
US$115 million. Media companies faced similar problems of acquisition binge. The conventional wisdom
in the industry that spur such manoeuvre was to grow the business by acquisition. Sony
Corporation (Japan) was a case in point of being one of the first to venture aggressively
into music and films. The same course of action was adopted by Vivendi Universal
(French), Bertelsmann (German) and AOL Time Warner (US). It was believed that a
product could be developed, then marketed through a wide range of in-house channels,
from compact disks, DVDs, Web sites and even theme parks. This led to a proliferation
of businesses requiring different skills and expertise, resulting in the failures of these
acquisition ventures.

In their haste to capitalize on the boom years, many companies reckoned that the fastest
way to beat the competition was to join in. After all, if you cannot beat it, join it. Thus
goes the acquisition spiral. With each new acquisition, it is assumed that revenues
automatically jumped up, while margins presumably stayed within acceptable ranges,
especially if the deal is accomplished through stock swaps. The growing company
acquires not just the market share but the expertise as well. Everything seems to augur
well especially from the stock market as long as the company grows and numbers are
good. However, therein lies the fundamental flaw with the growth-by-acquisition
strategy.

This is what Herb Greenberg of Fortune magazine commented of the US
corporate scene: “As with any addiction, the growth-by-bulk acquisition approach
necessitates increasing doses of the drug to preserve the high. The only way to keep
revenues growing fast enough for Wall Street is to buy ever more companies.”
Once the growth curve halts and the stock price plummets to an extent that initiates a
vicious downward spiral. The company loses its leveraging ability when capitalization
decreases and interest expense increases to service the loan financing for acquisition. In
the bid to reduce costs, the company starts trimming corners at the expense of quality,
customers, and employees.

Therefore, the adage still holds true, “Do not bite more than you can chew”. It can
become toxic for the company if they go into acquisition binge.

http://www.corporateturnaroundexpert.com

Dr Mike Teng (DBA, MBA, BEng, FIMechE, FIEE, CEng, PEng, FCMI, FCIM, SMCS) is the author of the best-selling business book “Corporate Turnaround: Nursing a sick company back to health”, in 2002. In 2006, he authored another book entitled, “Corporate Wellness: 101 Principles in Turnaround and Transformation.” Dr Teng is widely recognized as a turnaround CEO in Asia by the news media. He has 27 years of experience in corporate responsibilities in the Asia Pacific region. Of these, he held Chief Executive Officer’s positions for 17 years in multi-national, local and publicly listed companies. He led in the successful turnaround of several troubled companies. He is currently the Managing Director of a business advisory firm, Corporate Turnaround Centre Pte Ltd, which assists companies on a fast track to financial performance. Dr Teng was the President of the Marketing Institute of Singapore (2000 - 2004), the national body representing some 5000 individual and corporate marketing professionals in Singapore

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