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.
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.
Usually, when a synergy strategy falls flat, the people who put it together are pushed out and replaced by a team that unwinds the strategy, while deriding their predecessors as fools. Well, in the case of Internet conglomerate IAC, CEO Barry Diller has so much control that he didn’t just engineer the flawed strategy, which covered a wide range of businesses from financial services to dating services. Diller also is sticking around for the unwinding of that strategy. He recently held a pretty thoughtful interview with the Wall Street Journal, explaining how he got things wrong.
Diller says he realized IAC was “overly complex and unmanageable.” (That shows up in our research as one of the most commonly overlooked problems. The complications that come with scale can, by the way, be foreseen and assessed before a strategy to achieve scale is pursued.) He adds that “every mistake we’ve made in acquisitions has been outside our essential spheres of expertise”–underscoring the difficulties that we found when companies thought they were moving into an adjacent market, only to find that the new market is too different from the existing market where they operate.
As regulators, investors, and managers grapple with the deepening economic crisis, the question being asked by everyone is “Who’s next?” Who will join Bear Sterns, Lehman, Merrill Lynch, Fannie Mae, Freddie Mac and AIG on the failure list? We think that’s the wrong question. The strategies that doomed these companies were unleashed years ago, and whether or not others will be destroyed by the rising floodwaters will mostly depend on factors outside of their control. That’s not to say that managers at Washington Mutual and others rumored to be at risk should not bail water as hard as possible. The more important question, however, for those who through good management (or good fortune) managed to stay healthy is what they do now.
Bank of America’s hasty decision to buy troubled Merrill Lynch for roughly $40 billion gives us pause because it seems to rhyme with Conseco’s disastrous purchase of Green Tree Financial in the late 1990s. The Green Tree acquisition proved to be so toxic that Conseco soon took billions of dollars in writeoffs, then filed for bankruptcy protection. It was the third largest bankruptcy in US history up to that time.
While our whole premise for this blog and the book that spawned it is that too few people try to learn lessons from failure, there are a few books that have looked at specific kinds of failure and teased out the lessons. Some of these books are well worth reading. We’ll highlight some in this […]
Riverdeep, an Irish company that makes educational software, describes its agreement to buy textbook publisher Houghton Mifflin as a match made in heaven. Hmm. We think the deal may have been hatched elsewhere. As often happens in acquisitions that count on synergies, Riverdeep seems to have overpaid‚ deeply, if you will. The company will likely […]
What is it about the word "synergy?" It pretty much disappeared from the business lexicon after the AOL-Time Warner merger, the mother of all synergy deals, showed itself to be a disaster. But the word, or at least the idea, is all over the place again. Apparently, you can’t keep a bad word down. A […]
Following news reports that there is a coming glut of computer-animated films, we revisited our initial analysis of the Disney purchase of Pixar, which we felt was highly likely to fail. So far, Disney is doing just fine. Disney’s stock is up 25% since the deal was announced in January, while the Dow Jones Industrial […]