Mergers have destroyed billions of dollars in shareholder value because acquirers failed to anticipate the need to improve performance after closing a deal.
That's the premise of a new book by Mark L. Sirower, who teaches business strategy and competitive analysis at New York University's Stern Business School. "The Synergy Trap," published by Simon & Schuster, details research on a sample of major acquisitions from 1979 through 1990.
He notes that smaller losses on derivatives and trading have generated plenty of hand-wringing in the press, but poorly executed mergers have received little attention.
Mr. Sirower excluded bank and utility deals from his sample because variance in regulation in different parts of the country made it difficult to compare deals. But he said he intends to include some bank deals when he updates the book for the 1990s.
And he emphasized that his conclusions apply to any kind of merger, banking or industrial.
Mr. Sirower discussed his findings with American Banker in a recent telephone interview.
What is your thesis?
Sirower: My basic thesis is not that mergers are bad but that dumb mergers are bad. I believe the major reason for most failed acquisitions is not the way they were managed after the fact, but that most acquisitions are simply not informed decisions.
Where do acquirers go wrong?
Sirower: Many don't recognize that an acquisition is a very different kind of capital investment decision. Simply buying shares of another company is something that the acquirer's shareholders could readily do on their own.
In an acquisition, you pay the stand-alone value and the premium-more than anybody else in the world would pay-before you can touch the wheel. That's what sets up all the up-front risk.
If it's not an informed decision, and if the markets say you've lost money, the merger's dead on arrival. The money's gone, it's never coming back.
So synergy is the rationale for the deal-the way you justify the cost?
Sirower: The most common thing I hear is: "This will give us a strong position in a rapidly growing market." But that's not the real definition of synergy. Shareholders can already do that.
Synergy has to be performance gains above what's already expected for the stand-alone company to achieve. That's what leads to an informed decision.
I ask people to define synergy, and I get a different definition from everybody. It has to be performance gains.
What is "synergy trap?"
Sirower: Actually, there are three traps.
First, the company's executives don't understand what's built into pre- acquisition share value. If you look at market value and current performance, big expected gains are already built into share value. If it was already expected it isn't a synergy.
This is why up-front planning is so incredibly important. Eighty percent of companies do little pre-merger planning. Post-merger is the wrong time to do pre-merger planning.
The second trap is a poor understanding of what synergies-or performance gains-are, in both financial and competitive terms. An informed decision has to be a competitive plan, it has to be a strategy. To justify an acquisition, you have to be able to answer a couple of questions:
Can I make it more difficult for competitors to come after my market than what would otherwise be expected? And can I attack my competitor's markets in ways they can't respond to. That's the big test.
The third trap is a failure to understand what is built into an acquisition premium. Most companies have outside advisers do the due diligence, and that's an uninformed decision. The due diligence performed by a lot of Big Six accounting firms has a lot to do with evaluating the quality of the assets; it has too little to do with whether you can pass operational and competitive tests.
What's an example of a deal that fell into the trap?
Sirower: The Quaker-Snapple deal is a great example of how things fall apart. Quaker Oats executives probably thought they could turn Snapple into another Gatorade.
But competitors don't sit still while you generate performance gains at their expense.
Quaker executives should have asked themselves where they were going to sell a lot of Snapple. It was going to have to be sold in big bottles in grocery stores. They'd have to take shelf space, and they'd have to take it away from Coke and Pepsi, and not from their own brand Gatorade.
But overnight, Coke and Pepsi responded with competitive products. Quaker had sent a signal to competitors that they were going to turn this niche into a segment. They couldn't pass the competitive test. They couldn't do something their competitors couldn't. And they weren't prepared to defend their market. So they paid $1.7 billion and wound up selling for $300 million.