Pulte’s agreement to buy Centex for $1.4 billion means, in the words of the Wall Street Journal, that Pulte “succeeded in its quest to become the largest home builder in the U.S.,” but Pulte’s may be a Pyrrhic victory. The acquisition shows many of the characteristics of the classic mistake we identified in our book as “Doubling Down on a Bad Hand.”
We’ve updated “Perfecting the Art of the Deal,” a working paper that applies our research to potential mergers and acquisitions. Read the introduction below and click to download the entire article in PDF form.
There are some curious ideas being bruited about in the computer industry these days. It seems that cash is burning a hole in the pockets of healthy companies such as IBM and Cisco. Rather than have the cash sit around earning basically nothing at today’s low interest rates, the companies have decided to start looking for acquisitions. While that can be a splendid strategy in the right circumstances, the combinations being discussed don’t make much sense. Shareholders would be better off if the companies followed Oracle’s example and declared a dividend.
We’ve finalized two working papers that apply our research to today’s business challenges. The first, “Beyond Fear and Greed,” is an overall look at current strategic opportunities and pitfalls. Read the paper here, or download it in PDF form. The second paper, “Perfecting the Art of the Deal,” applies our research to potential mergers and acquisitions and is available in a separate blog entry.
Beyond Fear and Greed:
Capitalizing on Opportunities in the Current Crisis
By Paul B. Carroll and Chunka Mui
Warren Buffett says his guiding principle is to “be fearful when others are greedy and greedy when others are fearful.” There’s certainly plenty of fear out there, and thus plenty of opportunities to get greedy. Greed, however, does not necessarily translate into wealth. In this article, we draw on our two years of research into more than 2,500 major corporate failures and our related consulting work to describe the landmines that companies are mostly like to hit as they try to capitalize on today’s market turmoil. We also lay out a process for ensuring that greed does not send you down the wrong path–increasing the chances that you’ll pick a prosperous road.
Let’s say a pharmaceutical company is conducting clinical trials on a drug. Two trials find major problems. Several similar tests by others end in failure, too. Would the company get the drug approved? Of course not. Yet Pfizer is trying to drum up enthusiasm for its plan to buy Wyeth for $68 billion, even though its two other major acquisitions since 2000 have flopped and even though the track record for big M&A deals in the pharmaceutical industry is spotty at best.
In the process, Pfizer is raising numerous of the red flags that, according to our research, can mean a strategy is in peril. Pfizer seems to be seeing synergies that aren’t there; is underestimating the complexity that can come with additional size; may be paying too much; isn’t learning from prior mistakes; isn’t considering all its options; and is acting more because of problems in its core business than because of opportunities in a new one.
There’s something important that is getting overlooked in all the coverage of the stunning news that Bank of America has had to line up $20 billion in assistance from the federal government to handle problems at Merrill Lynch, just days after closing the Merrill purchase.
That something is this: The problems are just beginning.
As we’ve watched the Wall Street Journal chronicle the problems with Bank of America’s integration of Merrill Lynch’s retail brokers, we’ve assumed that competitors would be going as hard as possible after BofA and Merrill clients. We figured those competitors would succeed, too, because our research is full of examples of customers being poached during transitions such as those that follow a merger. Now, though, a WSJ article describes a strategy by Morgan Stanley that may be too aggressive.
The article says Morgan Stanley wants to combine its brokerage operations with those of Citigroup’s Smith Barney, to become the biggest retail broker. There are several problems, though, even beyond the sorts of culture clashes and other formidable integration problems that have afflicted BofA and Merrill, as well as many, many others.
Much of the $700 billion financial rescue package, originally intended to buy toxic assets, seems to be destined instead to finance a financial industry consolidation. An article in today’s Wall Street Journal highlights one of the dangers awaiting consolidators: the complexity of integration.
The article is replete with examples of how “the job of combining two banks is notoriously expensive, complicated and risky.”
When Bank of America announced its deal to acquire Merrill Lynch in mid-September, we noted in this space that we were skeptical. Based on the research for our book, we thought Bank of America was making a classic mistake: focusing so much on the benefits of an acquisition that it glossed over the potential problems. Merrill seemed to be fraught with potential problems–and they are now coming into painfully clear focus
We are exceptionally sympathetic to the plight of General Motors. In researching 2,500 business failures over the past 25 years for our recent book, “Billion-Dollar Lessons,” we rarely came across an industry that faced as many challenges as the auto industry—and that was before the spike in gasoline prices turned car buyers away from GM’s profitable SUVs and the onset of current economic crisis dried up credit and forced potential customers to put their wallets away.
Given the onslaught from so many fronts, it’s hard to see what the right answer is for GM. It is, however, easier to identify wrong answers, and our research suggests strongly that acquiring Chrysler would be a disaster.