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Buying Your Way Into Trouble

December 28th, 2010 - 9:21 am

At Forbes, Hilary Kramer says “2011 will be the year of the M&A.” Here’s why:

The Obama administration has recently been pushing for businesses to use the $1.9 trillion in untapped corporate cash to help jump-start the recovery. President Obama would like to see that money used for hiring and organic growth strategies. Excess cash, however–like the extra dollars in your wallet–often finds a way to get spent. In the case of corporations, much of it will be used for acquisitions. After the corporate cash building over the last years, many dollars will likely find a new home in 2011.

Moreover, with the economy certainly improving on numerous metrics, timing is now positive for the M&A market. Companies are more confident about the future–both their own and that of the macro economy. Those who have survived and emerged from the downturn are now poised to take advantage of opportunities. These opportunities are often in the form of strategic and value-adding deals.

“With the stock market rallying and CEO and Board confidence on the rise, I think the M&A business will be quite active in 2011,” says Steve Lipin, senior partner at the global corporate communications powerhouse, the Brunswick Group.

There’s nothing wrong with a nice, strategic acquisition — think of Apple’s purchase of Intrinsity earlier this year. Apple needs very specialized processors for its iOS lineup, so having its own in-house low-power chip-designers can help their bottom line and potentially hurt their competitors.

But mergers? Watch out — the big ones rarely work as well as advertised. Think DaimlerChrysler. Or AOL/Time-Warner. There’s an article by Steve Tobak from 2007 I keep handy. In it, he lists ten reasons mergers fail:

1. Flawed corporate strategy for either or both companies
2. One company sugarcoats the truth, the other buys a PowerPoint pitch
3. Sub-optimum integration strategy for the situation
4. Cultural misfit, loss of key employees after retention agreements are up
5. Acquiring company’s management team inexperienced at M&A
6. Flawed assumptions in synergies calculation
7. Ineffective corporate governance, plain and simple
8. Two desperate companies merge to form one big desperate company
9. CEO of one or both companies sells board and shareholders a bill of goods
10. An impulse buy or panic sell gets shoved down the board’s throat

The sixth item is the kicker, and remember it well if you’re looking to make money of a big merger. “Synergy,” I’ve long maintained, is a word whose real meaning is: “Interminable boosterism” in the best case, or “word used to explain why one company purchased or merged with another company, when there is no rational justification for the move” in the worst.

Still businesses have to do something with all that cash. And if they aren’t convinced they can grow their own sales in this economy, they might try to buy some growth.

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