Elsewhere in the world (read the US), mergers or acquisitions have had significant role to play in overall success of an organisation. NEXT was purchased in 1997 for $404 million, presumably saving Apple. It had set the stage for the greatest accumulation of shareholder value in corporate history. Apple’s acquisition of Beat for over $ 1 billion gave it quick entry in music streaming. A company like Apple whose core value is Innovation also went for M&A for speed. From 1951 to 1996, Warren Buffet rolling acquisition of GEICO created the now Giant Berkshire Hathaway Cornerstone asset.
In India the joint venture of Honda and Hero in two wheeler segment stood like an illustrious example of success. It made them the market leader with dominant market share. They recently separated only due to strategic reasons. Majority of joint ventures otherwise have failed in India, even globally.
Some of the glaringly failed M&A cases are serving as lessons for corporate leaders. Microsoft had acquired handset business from Nokia for 7.9 billion in 2013-14. In 2015, Microsoft had to write off 96 per cent of the value of the handset business. Google had bought handset business from Motorola for $12.5 billion in 2012. It had to unload the business for $2.9 billion. Tata Steel India’s acquisition of Chorus was also considered a classic one. Tata Steel had a less than double digit figure market share in the global steel industry and Chorus’ was over four times than that of Tata Steel. ‘Dwarf taking over Giants’ got coined and famous for the said JV. The JV is still in losses and Tata Steel is yet to find a buyer. In Tata Steel UK, overshadowing the proposed sale is the large pension schemes with liabilities of E14 bill, potential buyers are not ready to inherit it.
Few years ago, LG Electronics Inc and Philips had planned a joint venture wherein LG had to share its distribution channel and Philips had to share its technology, the JV did not even take off. I was then working on the project along with other core management team members and external experts like Late Sumantra Ghoshal and had noted diligently the reasons why it did not take place.
Typically 70 – 90 per cent M & A acquisitions have not worked out the way they were envisaged. Though such deals are a focus of top leadership and critical for their respective organisations, the primary reason remains that of dismal performances of cash rich corporates initiating M&A while window shopping talent, succession or technology upgrades from younger cash starved organisations. It is speedy and saves time both sides.
Roger L Martin, former dean of the Rotman School of Management at the University of Toronto and co-author of ‘Playing to Win’ in one of his Harvard reviews identified one of the critical reasons of M&A success. Companies that focus on what they are going to get from an acquisition are less likely to succeed than those that focus on what they have to give in. For e.g. when a company uses an acquisition to enter an attractive market, it’s generally in ‘take’ mode. When a buyer is in take mode the seller can elevate its price to extract all the cumulative failure value from the transaction. Martin also mentioned that for acquirer to be successful, he will have to improve its target’s competitiveness in four ways: 1. Being a smarter provider of capital growth 2. Providing better managerial oversights 3. Transferring valuable skills 4. Sharing valuable capabilities.
HR and culture issues have remained critical but often neglected. In various surveys and studies conducted on M&A transactions, majority reports suggest that talent related challenges remain significant followed by cultural integration. Amongst other pain points are employee retention, cultural integration, leadership assessment and resource management.
Last year in December, Microsoft finalized to acquire LinkedIn for $26.2 billion. The key highlights state that Jeff Weiner is to remain its CEO reporting to the CEO of Microsoft, LinkedIn to retain its distinct brand, culture and independence. Reports also suggest that LinkedIn went for the deal because as earlier in the year, LinkedIn stock price plummeted more than 40 per cent after they projected a weaker growth. As LinkedIn employees are largely paid in stock, it became difficult for them to retain good talent. LinkedIn focuses on adjusted EBITDA. The company purposely strips out the cost of stock based compensation which has the effect of turning losses into gains. Over the last two years’ stock based compensation represented a whopping 96 per cent of operating income or 16 per cent of revenue. They presumably gave in easily with that kind of price, now whether it will fail or succeed time can only tell.
Recent example of Havel taking over Lloyd brand for INA 1600 crores, will be evaluated over the time. Recent M&A deals and their future are being watched at carefully, also profoundly scrutinised by new age media. Microsoft’s acquisition of social network Yammer for $1.2 billion at 40 times the revenue of Yammer. Other heavyweights include Yahoo’s $11 billion acquisition of Tumblr, which is 85 times of its revenue, then there is Comcast, the largest US Cable producer that acquired NBC, Universal, TV+ movie broadcast network, there is Verizon the biggest mobile provider that purchased AOL.
And there are many more giants and dwarfs in the waiting, but as explained earlier, in this form of ‘give’ and ‘take’ as Adam Grant has explicitly explained, success lies in understanding the underlying strategic dynamics and ensuring that the sharing actually takes place.
