Business Exposed62
On July 4th, 2002, Ahold issued its rst prots warning, swiftly
followed by a second one on November 19th, then immediately
announced its seventh take-over in the US foodservice market.
An inquiry by the rm’s internal accountants revealed that
$30–35 million were used as illicit commission in Argentina.
Regardless of its growing problems, Ahold won the Dutch
Reputation Award in 2002, beating other top candidates such as
Heineken and Ikea.
February 2003 brought about Ahold’s largest scandal: nancial
fraud at US Foodservice, which eventually accrued to $880
million claimed in unrealized prots. In March 2003, the board
red van der Hoeven. Several years and one court trial later, he
received a suspended jail sentence for his role in the nancial
malversation.
The story of Ahold is a typical one. In hindsight, we all think
how could that happen? This house was bound to collapse! But
at the time we all bought into it, both their groceries and their
shares. That’s because it is not a one-man story; surely van der
Hoeven was an overly deal-eager guy with an eerie resemblance
to Icarus, but it is also a story about time compression dis-
economies, an over-reliance on numbers, a strategy adapted to a
rm’s actions (rather than the other way around), and one very
big yam. And this concerns a whole management team, boards,
banks, shareholders, analysts, award committees, the business
press, and business schools (who audaciously write management
cases and give honorary degrees for stories that are too good to
be true). It is a whole system. And the system may at some point
push people towards the sun, to subsequently watch their fall,
shaking their heads in disbelief.
Most acquisitions fail – really!
Of course, acquisitions also played a huge role in the Ahold story.
The processes that lead rms to take on too many acquisitions,
too fast, are much the same processes that lead them to pay too
much for their takeovers. The former lead to poor integration
633
n
The urge to conquer
and little value creation; the latter lead to very high acquisitions
premiums. Acquisition premiums – the amount of money the
acquiring rm pays on top of what the target is currently worth –
are often quite astronomical; 70–80 percent above the company’s
current worth is not unusual (so perhaps “astrological” would
have been a more accurate description . . .). A very high price, in
combination with little value creation, is a lethal mix.
And I have little doubt that this forms the main reason why
the track record of acquisitions, in terms of their success rate
(to create extra value), is truly abysmal. So let me show you
the stats on M&A again: you may have seen them before, but
since I am sure you may (still) not believe them, here they are
once more.
Seventy to eighty percent of acquisitions fail, in terms of creating
stock-market value. Two overview studies in the prestigious
Strategic Management Journal showed that, on average, share
prices of acquiring companies fall between 0.34 percent and 1
percent in the ten days following the announcement of an acqui-
sition. And this is a result consistent over a period of 75 years of
stock-market data!
“But that’s only 10 days,” you might say. “These acquisitions
might still create value in the long run, right?” Nope; wrong.
Research in the Journal of Finance concluded that acquiring rms
experience a wealth loss of 10 percent over the ve years after
merger completion.
“Perhaps the stock market initially is too pessimistic?” Actually,
quite the opposite: a study on 131 big deals (over $500 million)
indicated that in 59 percent of cases, market-adjusted return
went down on announcement. Hence, the stock market was
positive about 41 percent of deals. Not an awful lot, but it could
have been worse. Or could it. . . ?
After 12 months, 71 percent of all those deals had negative
consequences! That is, of the 41 percent of cases where market
value went up on announcement because the stock market was
optimistic about their potential to create value, only 55 percent
Business Exposed64
still had positive returns the year after! Thus, even the stock
market had initially been way too optimistic. Even more deals
ended up destroying value than they had rst expected.
Yet, every time I show these statistics to a group of executives
they frown and proclaim, “We know this, but it is not true for
our company.” Often followed by, “We analyzed all our deals and
two-thirds were a success” (not sure why it is always two-thirds,
but it always is). Yeah, right.
Almost invariably, it concerns a round of interviews or perhaps
a questionnaire, sometimes supplemented by a few tables and
gures of dubious descent, asking some people in the business
whether they thought a particular deal was a success. Now, if
these people say “no” to this (almost rhetorical) question, you
can bet it was nothing short of a disaster.
Of all the deals conducted, this leaves two-thirds of “non-disasters”,
which is not the same as successes. Perhaps another third did not
cause major problems as the integration went OK, but that does
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