Good discussion of M&A in strategy+business from Booz. Points out that making acquisitions is, like most other activities, something you get better at with practice, so skilled companies build real capability at doing it. Cisco is a well-known case [also with much skill at alliances prior to possilbe acquisition – Google will point to tons of stuff on them] and this article highlights Johnson & Johnson. Especially useful extra, though, is the guidance offered on managing the process. Also like other activities, acquisition capability consists not only of the skills of people doing it, but the existence of rigorous, proven procedures.
The one area that could be strengthened is the piece on ‘strategic due diligence’. Having worked on this a bit with PWC, it looks like financial due diligence still overwhelms all other issues in the acquisition planning process. I’ve never bought the ‘acquisitions don’t work’ findings that everyone seems to just accept as true. All the studies I’ve seen look at the wrong indicators to arrive at this conclusion – often short- to medium-term movements in stock price. But we’ve seen repeatedly that stock price movements are a pretty useless indicator of strategic value, probably because investors have little clue how a company’s strategy relates to longer-term earnings prospects.
Good acquisitions not only give rise to immediate synergies [which may or may not give a financial pay-back on the deal], but also
- give access to additional resources that enable the merged company to drive performance that was otherwise not accessible, and
- [even better!] enable faster development of yet more resources and capabilities that will drive performance still further in the future
Neither of these are usually sufficiently recognisable to outsiders at the time, and are too distant to be well-reflected in the stock-price.
One reason strategic due diligence is so hard to do is the abstract and confused terminology on the very issues that make it important – resources and capabilities. This makes it hard to measure these things, and even harder to work out their impact on longer-term performance. See chapters 9 and 10 of Strategic Management Dynamics for a clarification.