This sheet of paper was provided at of the Ben Graham Centre’s 2017 Value Investing Conference that I attended last week. Tony Fell, the retired Chairman of RBC Capital Markets & Former CEO, used it during his speech. He was with RBC Capital Markets and its predecessor for 48 years. We often hear and see that M&A is not as successful as it should. We hear that’s it’s the culture or this or that for the main cause of failure. The list below is brief and useful. Here are the major causes of failed acquisitions and how to avoid them. I particularly like point #3 and #12.
- Start off by reminding yourself that fully 2/3 of acquisitions do not work out and actually destroy shareholder value. The odds are two-thirds stacked against you from the get go.
- Always remember – the best deal you do in your career is often the one you don’t do.
- Always remember the buyer needs a thousand eyes – the seller only needs one.
- Beware so-called major transformational mergers or acquisitions – they usually blow up and many have been catastrophic.
- In any takeover usually best to be the seller and get a good premium.
- Synergies are often significantly over-estimated and take longer to achieve than forecast.
- Beware of the auction process – and don’t bid against yourself
- Hold your ego in check, don’t get caught up in the euphoria of an acquisition and pay too much. When you pay too much, your returns may be terrible and your may be faced with substantial write-offs.
- Beware poor, or incomplete acquisition due diligence. Nothing worse than major operational or financial surprises after you buy a company.
- Calculate earnings accretion or dilution based on constant leverage ratio. Accretion due to increased leverage is not accretion.
- Beware of potential clashes in corporate culture of two merging companies.
- Remember that the vision of the acquisition is great but execution is where it’s at. It’s one thing to acquire a company, it’s quite another to integrate it into your own business and run it. Vision without execution is hallucination.
- No acquisition is make or break. There is always another train.
- On any acquisition don’t increase leverage beyond a very prudent level. Finance with equity.
- Beware international acquisitions. Foreign markets are often more competitive than Canadian markets with lower margins. Don’t expand beyond your ability to manage tightly.
- Notwithstanding the above perhaps 10%-20% of acquisitions are outstanding successes.
- Good Luck.
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