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Do Acquisitions Bear Fruit? A Pragmatic Perspective

Recently, I was interviewed in my capacity as a tenured corporate director of public companies by Corporate Board Member magazine of New York Stock Exchange's Governance Services, on the following subject: "Does M&A Bear Fruit?" Therefore, I took the opportunity to sit back and reflect on my hands-on experience as well as observations on mergers and acquisitions in the corporate world. In this article, instead of covering both M and A, I am jotting down my thoughts in summation on the acquisitions part of M&A.

Globalization has propelled acquisitions, and acquisition activities have fueled globalization. For the last two decades, a plethora of megadeals and various sizes of acquisitions have been transacted; some are deemed fabulously successful, but a significant share of deals are subpar, at best, to the desired results—if not a total disappointment.

Acquisition is an effective tool for a company’s growth as a part of corporate growth strategy; and it is one of the top fiduciary duties of a company board’s governance oversight. It is highly recognized that it could be faster and/or more economical to buy something than grow it organically. However, statistically, the acquisition failure rate is quite high.

The often targeted “synergy” has been an over-stated reason for acquisition. Achieving synergy is easier said than done. As Warren Buffett puts it in the Berkshire Hathaway’s 2017 Annual Report, “...As is in marriage, business acquisitions often deliver surprises after the I do’s.” Therefore, how to maximize payoff and mitigate potential failure should be on the mind of every business decision maker.

To deliberate the plausible questions before initiating an acquisition should be a prerequisite. Questions include: What are the essential elements an acquisition needs to have in order to be successful in the long term? What questions should directors ask management to ensure a deal is a good decision? How does a board ensure management’s proposal is aligned with company strategy? Can this acquisition change the company’s growth trajectory? Can the resources of the acquired company (or assets) substantially improve the product/service in ways that customers would pay more for (profit margin increase)? What are common pitfalls in initiating and executing an acquisition?

When considering an acquisition, the intent, thus the approach, can be divergent, ranging from the long-term sustainability to the short-term gain. The preparation also varies with the company’s historical track record—companies that have “routinely” conducted acquisitions with all lessons learned vs. companies that have not.

Long-term goals are the differentiating essence in this process, meaning beyond a CEO’s tenure with the company. Some acquisitions that are carried out are intended to boost immediate earnings per share (EPS) without having the well-thought-out study and more importantly, the necessary knowledge about future potentials of the acquired entity vis-a-vis anticipated market, technology, and competitiveness.

As an acquisition moves through the four main phases—target selection, pricing evaluation/negotiation, due diligence, and integration, the following top five essential elements are to be brought to the center stage:

• Articulation of the sound purpose with clarity
• Value determination by calculating the impact on profits from the acquisition vs. weighted-average cost of capital along with other metrics
• Validation of assumptions
• Ability to pull the plug in due diligence
• CEO’s broad vision, holistic knowledge and well-rounded ability

Prior to pursuing an acquisition strategy, it is desirable to position the company to aspire to the culture of long-term growth. When there is a proposed acquisition target on the table, the board and management need to:

• Ensure the understanding of the fundamental reason for this acquisition and how and why it is aligned with strategy (even revisiting the current strategy, is it valid and effective?)
• Have a deeper deliberation on the reason and the purpose of an acquisition
• Ask how to avoid, “It looks good, but not really.”
• Define when/who/what: timing, resource capability, what-to-do after transaction (a plan)
• Verify the perception of fit: comprehensive plan, rationale and narrative to be understood
• Deliberate on how to avoid common pitfalls

The top common pitfalls that are likely encountered in an acquisition endeavor, which could exert deleterious effects on the company’s long-term performance include:

• Overpaying
• Overleveraging
• Company (asset) purchased for the wrong purpose
• Company (asset) purchased for the wrong reason
• New businesses integrated into misfit business models

When the acquired entity is bought at too high a price, everything else becomes less important and it can hardly be a good investment.

In order to eschew the common pitfalls, what questions should be asked and answered to ensure a deal is a good decision? Below are some examples of questions to be addressed:

• Is this for cost-saving (in fixed cost, in scale or for cross-selling)?
• Is this for footprint expansion (strategic geographic locales)?
• Is this for gaining a greater market share to achieve greater efficiency (improved market reach and industry visibility)?
• Is this for securing current leading position (command a price premium or better technology or better manufacturing)?
• Is this for diversification of business portfolio (a new way to do business)?
• Is this for re-positioning in the industry’s value chain?
• Is this a defense against commoditization?
• Is this for “not missing out on the next big thing”?
• Does the acquisition alter or change business model? If so, what are the tactics?
• Is this to aim at a jump-start transformative growth and change the growth trajectory (buying innovations)?
• Is this for a new business model as platforms for transformative growth? If so, is the autonomy in order?
• What are behind those numbers including today’s anticipated market, technology, manufacturing, customers, etc.?
• What other synergies will be obtainable after the acquisition?
• Does a bolt-on acquisition or platform acquisition make more strategic sense under the company’s specific environment?

The last phase of acquisition involves the nuts and bolts of integration. The success of acquisitions depends on how well the management can integrate the acquired entity into the company while maintaining the efficiency of day-to-day operations during and after the acquisition. To foresee how integration will play out, we must be able to describe exactly what we are buying. Albert Einstein speaks of it this way: “You do not really understand something unless you can explain it to your grandmother.”

This also brings up another question: Can a company synergistically and advantageously integrate an acquired entity into the parent company if the company has not been able to demonstrate the ability for organic growth?

The ultimate success of a public company is typically measured by shareholder long-term returns and the value creation for all stakeholders. The board of directors should be prudent when considering potential transactions, as acquisitions do not guarantee increased shareholder returns. An owner-oriented culture certainly adds additional value to executing acquisitions.

Needless to say, there have been innumerable success stories in elevating a company’s top-line and bottom-line in a timely manner, thus the long-term shareholder returns, through well-thought-out and adroitly executed acquisitions. It is all up to the company!

Appearance

Dr. Jennie Hwang will present a lecture on "Assembly Integrity and Reliability" at the SMT Hybrid Packaging International Conference on May 17, 2017 in Nuremberg, Germany.

This column originally appeared in the May issue of SMT Magazine.