What are the things we look for when thinking of a successful relationship? Compatibility, appeal, attitudes, willingness to make it work…
This blog is not about relationships, it is about mergers and acquisitions and why we see so many of them despite the fact that we all know not many of them work out well in the end. Even though M & As and relationships are two different things, the dynamics are really not that different, and neither are the factors that lead to their success and failure.
About 80% of the global foreign direct investment is made in the form of M & As and out of these 90% fail, which is much higher than the divorce rates of 40% – 50%, so why is it that facebook acquired whatsapp for $19BN, HP acquired Autonomy, Chase merged with JPM and many many more?
Understanding why would become very easy if we thought of business relations under the same light as the human relations. People all over the world are getting married because if it does work out, the life could be pretty damn fulfilling and similar is the case with businesses. If the M & As do work out there is countless benefits for businesses involved. I am not going to go into the benefits and drivers for these M & As because that’s beyond the scope or relevance for this blog.
There are things you can do to make relationships work and that’s exactly how it works with businesses. There is the potential that should you get everything right, there could be a successful future, so the success really is in your control (to some extent). Successful businesses don’t invest in M & As until they are ready financially and structurally to take on another business, and the ones that do, don’t usually end up triumphant in the end, which is very similar to being ready for a relationship – you can’t complete someone else before you complete yourself.
The way you deal with your new partner firms is also key – How much autonomy to give? How much stakes does each partner have? How much price premium do you invest in the partnership? Another factor which determines the success of M & As activity is the synergies i.e. compatibility between the two firms – what can the other partner bring into the business to add value? And how could you exploit these synergies effectively?
And in the end even if it doesn’t work out, businesses are not complete losers as they have to some extent, bridged the learning curve. So when they merge or acquire next, they would know better and do better. All these dynamics are not very different from human relationships, which is why it helps to think about businesses in an organic and ‘humane’ way, because at the end of the day businesses do exist for the people in it and for those associated with it. However, there are fundamental discrepancies in what human beings and business want and do. People want to maximize utility/ happiness and businesses wish to maximize profits, but understanding how each one of them go about doing it, does not vary very much… This is something I have learnt from economics (even though it doesn’t always work, it is an amazing stand point to start thinking about things).