M&A's New Currency

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gbennett 12/5/2012 | 2:31:06 AM

re: M&A's New Currency Comrades,
On a slightly different point...why do we think that so many acquiring companies tend to make so little of their acquisitions after they've done the deals? Jeez, I mean they've spent a fortune on this company, you'd think they'd want to make the best of it.

I have a half a dozen examples I can recount from internal experience, but I'd prefer not to name names :-) By the way, one of you asked whether acquiring companies use any kind of internal index to measure the wisdom of their acquisition decision. My guess is they don't. Executives hate to be reminded of the magnitude of their mistakes :-)

Cheers,
Geoff

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gbennett 12/5/2012 | 2:31:06 AM

re: M&A's New Currency Comrades,
Some very interesting comments from you on this thread. Maybe I can summarise by re-stating some of the points...

- Acquisitions donGÇÖt just happen for the obvious reasons GÇô technological or commercial GÇ£time to marketGÇ¥. There are GÇ£strategicGÇ¥ and GÇ£accountingGÇ¥ reasons.

- Strategic reasons may include shedding "bad feelings" from previous efforts in this space.
- Accounting reasons seem to be a symptom of the VC expectation. In other words, the acquiring company needs to retain the highest level of profitability, and can't afford to endanger this by too many internal development projects - even if these projects would have been cheaper in the long run. Accounting rules like "pooling of interest" and the ability to write off goodwill are contributary factors.

- Acquisitions can be made for defensive reasons. Perhaps a company needs to "take out" a young upstart before it becomes too much of a problem.

One conclusion I would draw is that there is a serious problem with the internal development framework in western companies. If internal politics can scupper an otherwise well-thought-out project, this is a problem. If lack of willingness to invest in internal projects is overshadowed by an almost reckless need to "do a deal" for an acquisition, then this is a problem. If, as one of you has suggested, it is difficult to motivate an internal team to think out of their existing box (both literally and metaphorically) then this too is a problem.

I also wonder if there isn't something of the macho mentality about acquisitions. With our modern veneer of civilisation, maybe this kind of activity is the equivalent of the old "rape and pillage" of the Dark Ages? I definitely remember remarks a couple of years ago that Juniper "couldn't possibly be all that successful as they haven't acquired anybody". There was me thinking Juniper was as successful as it was precisely because it hadn't wasted its time and (shareholders') money acquiring anybody. Judging by the strutting that typically follows an acquisition, I definitely think there's something to this idea.

As we start to see some recovery in the markets, it looks like we're also beginning to un-learn the lessons we all said we'd never forget about the past couple of years - you know, the ones about sensible P/E ratios and stuff. If companies are gearing up for acquisition fever once again then I suspect we'll also see a return to nonsensical acquisition bids.

Cheers,
Geoff

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whyiswhy 12/5/2012 | 2:31:00 AM

re: M&A's New Currency Sorry and gald at the same time to see from your posts that you "still believe" in virtuous business principles. But the truth is that in many, many M&A cases, the "real" reason is as I stated: inside dealing.

This explains why the acquistion rarely works out. There is no incentive post-merger that compares to the "shower" everyone involved gives themselves within 90-180 days of the closing of the deal. Why bother making it work longer term that that?

Look at all of KK's acquistions at JDS...how many are still there? How relatively rich is JDSU? How relatively rich is KK?

I would say KK is doing 1000% better relative to when he started at JDSU than JDSU is from when he started.

JMHO

-Why

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douggreen 12/5/2012 | 2:30:51 AM

re: M&A's New Currency Geoff,

Cisco in fact bought 3 LAN switch companies (including Grand Junction). At least part of the reason that they bought Kalpana was defensive. IBM had an outstanding offer in stock that Cisco countered in cash. Most of us who knew the situation believed it to be almost totally defensive.

In fact, aquisitions are often a mixture of offensive (to get the product) and defensive (to keep competitors from getting them).

A third reason for aquisitions is product drag (e.g. selling more routers because you have LAN switches, etc.).

A fourth... getting into new markets. Part of Cisco's reasons for buying Cerent was to get the product and revenue, but it also got them entry into the regulated side of the carriers.

All of these factors make it hard to judge the success of some aquisitions because success can be measured on many fronts. However, one can certainly find a lot of obvious failures, as some have pointed out on this board.

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