Making Overseas
Acquisitions Work
By Dipankar Chatterji
Workshop – GGI World Conference
Beijing 23rd October 2010
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• THE GLOBAL TAKEOVER SCENE
• WHY ACQUIRE ?
• ACQUISITIONS THAT DIDN’T
WORK
• LEARNING FROM FAILURES
• MANAGING ACQUISITIONS – THE
RIGHT WAY
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THE GLOBAL
TAKEOVER SCENE
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Even post meltdown the global appetite for
takeovers continue to grow
DEAL MATRIX
9-month 2010
9-month 2009
Country
Value
No. of Deals
Value
No of Deals
US
615.0
7603
574.2
5341
UK
140.1
1831
108.8
1844
China
137.4
2807
120.6
2339
Brazil
121.9
379
49.6
210
Canada
116.5
1490
59.6
1031
Japan
81.5
1925
97.2
2356
Australia
75.3
1174
109.5
1243
Spain
66.4
846
45.8
645
France
64.7
1191
54.2
954
India
56.7
948
17.4
747
Total
2033.9
30763
16674
27334
Value in $ Billion
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• In 2009 globally 5800 companies involved in
acquisitions valued at over $2.3 trillion
• Many invidual deals are valued over the billion
Dollar mark
• Many domestic mergers in the same country end
up being cross border acquisitions
– Sandoz acquired Ciba Geigy – integration of
operations across the globe
– Many other examples
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WHY ACQUIRE ?
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Acquisitions driven by desire for• Topline growth
• Increased market share
• Eliminating competition
• Balancing product portfolio
• Moving upstream or down stream in supply chain
• Acquiring technology – CISCO built its
technological base through acquisitions
• Acquiring distressed assets
Overall objective of shareholders value creation
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ACQUISITIONS
THAT DIDN’T
WORK
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• A reality check of global cross border acquisitions
reveals that most of them destroy value.
• Some studies have put the failure rate at between
40% to 80%. The Mckinsey estimates show 61%
failure rate.
• The School of Business at Loyola College
Chicago studied 6824 cross border acquisitions
during 1985 – 2005 by buyers from 75 countries
and targets in 128 countries. The study revealed
that the majority of them destroyed value – $187
billion of acquirer shareholder wealth was
destroyed in three days around the announcements
of acquisitions.
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• A study of 89 acquisitions of American companies
by foreign buyers between 1977 and 1990 showed
that most of them did not improve operational
performance one year after acquisition(Source:
Financial Times).
• Many examples– Acquisition of Columbia Pictures by Sony. After
paying a significant premium for the company, Sony
was forced to take a $3.2 billion write down in 1994.
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– After the HP-Compaq merger
announcement the share prices of the two
companies declined by 21.5% and
15.7%.Combined loss in market
capitalization was $13 billion and the share
price of HP continued to fall.
– Ben Q acquired the mobile devices division
of Siemens & went bankrupt after a year of
heavy losses.
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– AT & T acquired NCR and lost billions of
dollars.
– Many other examples, in the auto industry.
The jury is still out on Tata’s acquisition of
Land Rover & Jaguar and Zhejian Geely
Holding Group’s acquisition of Volvo.
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Why did so many cross border acquisitions fail?
Many reasons • Wrong selection of target
– Why are we a better parent for the company than
someone else?
– Will we be able to create more value by being more
competitive, having a stronger cost structure,
gaining additional competitiveness?
– When will this value be realized?
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• Lack of attention to cultural factors during due
diligence.
– Errors during due diligence are rarely technical. In
many cases people fail to pay attention to cultural
factors. According to GE this is the reason for
failure in three out of 5 cases.
• Lack of compelling strategic reason for
acquisitions. Many companies should not be
acquiring at all. A company with difficulties of its
own is unlikely to be helped by acquisition. You
do not acquire your way out of trouble. Also
corporate “glory” cannot be a motive for
acquisition.
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• Flawed understanding of the new business.
– Very often commercial due diligence does not
identify black holes.Cross border acquisitions have
failed because of unfamiliar accounting
rules,different disclosure practices and legal systems
with different attitudes towards property rights
• Unrealistic expectations or excessive valuation
– Deals should not be unstoppable.There must be a
walkaway price. Very often competitive bidding
sends prices beyond original valuations and the
acquirer must know whether at such prices
expectations will be realized.
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• Flawed integration management
– Most cross border acquisitions involve insufficient
integration efforts.Bridgestone acquired Firestone in
1988 – but no real integration effort for five years.
Senior Firestone management was left in place, no
cost savings were generated and total losses
amounted to $ 1 billion by 1992
– Employee stress and uncertainty post acquisition is
also caused by poor integration efforts.Merger
creates uncertainty and best people leave. Firestone
workers ended up in a strike in 1994-95 driven by
Bridgestone’s cost cutting efforts.Nestle had similar
problems with acquisition of Rowntree in UK.
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• Lack of shared vision
– It is quite common for the acquirer company and
the target company to pursue different
philosophies, different practices and different work
ethics
• Conflicting corporate or national culture
– Some companies pursue authoritarian/ centralized
cultures
– Some are more empowered
– Some encourage risk taking, some do not
– National attitudes also make a big difference
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• Not investing adequate resources to
consummate the transaction
– Value is created after the deal is
done.This may require substantial
investment both in terms of human
resources and financial resources. If
such resources are not provided the
integration process fails.
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MANAGING
ACQUISITIONS –
THE RIGHT WAY
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• Managing acquisitions is a mix of strategic and
tactical moves
• Find the rationale for a takeover and pursue it to
its logical end
• Due diligence is very important but post deal
integration is more important
• Plan for integration before the deal is made
• Get the buy in from the acquired company in the
immediate post deal phase
• Develop a clear communication plan throughout
the process. This is the only way to tackle
different country cultures.
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