CHAPTER TWENTY-NINE
The Five Rules of Successful Acquisitions
THE MERGER BOOM OF THE LAST few years is not based on business reasons. It is financial manipulation, pure and simple. But an acquisition must make business sense, or it does not work even as a financial move. It leads to both business and financial failure.
There are five simple rules for successful acquisitions, and they have been followed by all successful acquirers since the days of J. P. Morgan a century ago.
1. An acquisition will succeed only if the acquiring company thinks through what it can contribute to the business it is buying, not what the acquired company will contribute to the acquirer, no matter how attractive the expected “synergy” may look.
What the acquiring company contributes may vary. It may be management, technology, or strength in distribution. Money alone is never enough. General Motors has done very well with the diesel-engine businesses it bought; it could and did contribute both technology and management. It got nowhere with the two businesses to which its main contribution was money: heavy earthmoving equipment and aircraft engines.
2. Successful diversification by acquisition, like all successful diversification, requires a common core of unity. The two businesses must have in common either markets or technology, though occasionally a comparable production process has also provided sufficient unity of experience and expertise, as well as a common language, to bring companies together. Without such a core of unity, diversification, especially by acquisition, never works; financial ties alone are insufficient. In social science jargon, there has to be a “common culture” or at least a “cultural affinity.”
3. No acquisition works unless the people in the acquiring company respect the product, the markets, and the customers of the company they acquire. The acquisition must be a “temperamental fit.”
Though many large pharmaceutical companies have acquired cosmetic firms over the last twenty to thirty years, none has made a great success of it. Pharmacologists and biochemists are “serious” people concerned with health and disease. Lipsticks and lipstick users are frivolous to them.
By the same token, few of the big television networks and other entertainment companies have made a go of the book publishers they bought. Books are not “media,” and neither book buyers nor authors—a book publisher’s two customers—bear any resemblance to what the Nielsen rating means by “audience.” Sooner or later, usually sooner, a business requires a decision. People who do not respect or feel comfortable with the business, its products, and its users invariably make the wrong decision.
4. Within a year or so, the acquiring company must be able to provide top management for the company it acquires. It is an elementary fallacy to believe one can “buy” management. The buyer has to be prepared to lose the top incumbents in companies that are bought. Top people are used to being bosses; they don’t want to be “division managers.” If they were owners or part-owners, the merger has made them so wealthy they don’t have to stay if they don’t enjoy it. And if they are professional managers without an ownership stake, they usually find another job easily enough. To recruit new top managers is a gamble that rarely comes off.
5. Within the first year of a merger, it is important that a large number of people in the management groups of both companies receive substantial promotions across the lines—that is, from one of the former companies to the other. The goal is to convince managers in both companies that the merger offers them personal opportunities.
This principle applies not only to executives at or near the top, but also to the younger executives and professionals, the people on whose dedication and efforts any business primarily depends. If they see themselves blocked as a result of an acquisition, they will “vote with their feet,” and as a rule they can find new jobs even more easily than displaced top executives.
Most executives accept these five principles, at least since the debacle of the conglomerate merger movement in the late 1960s. But they argue that the principles don’t apply to an inflationary period when acquisitions have a financial and macroeconomic rather than a business rationale.
Here the German experience during the great inflation of the early 1920s offers a convincing rebuttal. The “merger boom” of that period was as hectic as anything seen in the United States in the 1980s. And there were four great “raiders”: Hugo Stinnes, Alfred Hugenberg, Friedrich Flick, and Germany’s leading steel maker, the Krupp Works. Only Hugenberg and Flick succeeded. Hugenberg bought out newspapers and built the first modern newspaper chain in Germany. He survived, indeed prospered, until Hitler, whom he had helped put into power, dispossessed him. Flick bought only steel and coal companies and survived both World War II and imprisonment as a Nazi war criminal to build yet another, even bigger, business empire before he died a few years ago.
Stinnes, who as late as 1919 had been a totally unknown coal wholesaler, by 1922 dominated German industry as no single man has ever dominated the industry of a major country. But nine months after the German inflation ended, the Stinnes empire—a heterogeneous collection of steel mills, shipping lines, chemical companies, banks, and other unrelated businesses—was in bankruptcy and being dismantled.
As for Krupp, for decades before Germany’s richest and politically most powerful firm, it survived, but it never recovered. It could never manage the heterogeneous businesses it had bought—shipyards, a truck manufacturer, and machine-tool companies, among others. Eventually Krupp was bled white by its acquisitions. In the early 1970s, the Krupp family was ejected from ownership and management alike, with control of the half-dead company being sold to the Shah of Iran at a fire-sale price.
The New York stock market—at least since its recovery from its infatuation with conglomerates in the 1960s—certainly senses the importance of the five acquisition rules. This explains why in so many cases the news of a massive acquisition triggers a sharp drop in the acquiring company’s stock price.
Nevertheless executives, of acquirers and targets alike, still largely ignore the rules, as do the banks when they decide to finance an acquisition bid. But history amply teaches that investors and executives, in both the acquiring and acquired company, and the bankers who finance them soon come to grief if they do judge an acquisition financially instead of by business principles.
(1981)