You learn early in business school that the key to any kind of merger and acquisition is due diligence. Take your time, do your homework, and let the experts have their say before signing contracts.
So why do certain M&A deals go south? At Confie, we’ve put together a few of the leading reasons your company should walk away, and examples of Corporate America partnerships that didn’t exactly make Wall Street proud. Most of these deals actually happened–to the detriment of one or both parties–while one involved a walk away before papers were signed.
When Cultures Clash, M&A Deals Fail
Culture clash is possibly the single biggest reason why M&A deals fail. It’s like a marriage that’s doomed right from the start simply because the two partners are so different.
In the corporate world, one good example of this lethal culture clash was when the staid and conservative Daimler-Benz purchased the more rollicking Chrysler in 1998 for $36 billion. The German automaker was the definition of button-down in the way it conducted business, while Chrysler was definitely more free-rolling and creative. Daimler-Benz had a top-down management structure, but the American company was much less autocratic.
The two management teams thought differently about brands, too. Daimler-Benz was selling luxury models to the well-off while Chrysler had to be much more price-conscious since they were selling to a much less selective audience. So, they weren’t even speaking the same language when it came to product cost and quality concerns. It was a bad marriage all around.
Daimler-Benz offloaded most of Chrysler Group to the private equity firm Cerberus Capital Management just nine years later at a huge loss–and probably didn’t even mind writing the deal off.
When You Overpay and Don’t Know What You’re Getting
Former Guns ‘n Roses guitarist Slash once sued a real estate agent for letting him buy a mansion without enough guest parking space to allow him to throw parties. This is only worth mentioning here because it turned out he’d never actually seen the home before buying it.
This isn’t exactly how the 1993 purchase of Snapple by Quaker Oats panned out, but to neutral observers, it might seem as though the two entities had never even met before the marriage.
The sale price for Snapple was $1.7 billion, which made Wall Street feel that the smaller fruit drink company had committed highway robbery. But the premium price was worth it to Quaker Oats. Their Gatorade brand had been selling like crazy, so they felt they knew beverages. How different could Snapple be?
What might not have been fully taken into account was that the companies had two very different major sales channels. Quaker Oats sold its products to supermarkets while Snapple was primarily available in convenience stores, service stations and other impulse buy locations. Quaker Oats tried to change that model, with poor results.
When the purchaser finally figured out that they didn’t understand and couldn’t relate to the Snapple marketing strategy, it sold the underperforming acquisition. Turns out Wall Street was right about that initial $1.7 billion price tag for the fruit drink company being a boondoggle price. Quaker Oats sold Snapple to Triarc Beverages and got just $300 million for it, a little more than two years after the original deal.
When Your Acquisition is More of an Expensive Rescue than a Partner
If your acquisition is about to circle the drain, at least make sure you know that in advance and have the capability and the commitment to save it. There should be no surprises.
Maybe Microsoft ignored that good advice when it acquired Nokia in 2013 and paid $7 billion for the privilege. In this case, they were looking for an established handset device maker rather than making their own.
What the larger company apparently didn’t do is take a close enough look at the product line Nokia was currently putting out. In its heyday, Nokia technology had been state-of-the-art, but that time seemed to be in the past. The company’s current devices had lost their technological edge by the time of the purchase, and Microsoft closed down the company and put 15,000 Nokia workers on the unemployment line just two years later.
When Partners Don’t Understand That Politics Is a Moving Target
American corporations have long made it a practice to base their home offices where it makes the most sense from a taxation point of view. For many U.S. companies, this has meant relocating offshore to so-called tax havens. Predictably, American politicians and many segments of the public have long hated this strategy.
In 2016 the U.S. Treasury Department enacted new rules preventing inversions, which are corporate maneuvers whereby a U.S. company becomes a subsidiary of a foreign company and moves its tax residency to that country. This allows them to essentially commit tax evasion.
Unfortunately, this was also the same time that Pfizer decided to merge with Ireland-based Allergan, basically to move the company to a very corporate-friendly location. The tax regulations changed before the two companies could sign a deal, and both parties walked away.
The lesson here is that a corporation’s army of accountants and tax lawyers must stay ahead of changing politics.
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At Confie, one of our prime areas of expertise is mergers and acquisitions. We are proud to be the M&A partner of choice in the personal lines industry. Depend on us to manage your sales process and get you the results you expect.