70% of Mergers & Acquisitions Fail – What to do about it

• M&A deal volume has been significantly higher in 2011 compared to 2010
• 70-90% of these deals fail

Why do M&A happen?

• companies have the financing to do so
• M&A has the lure to managers that it will transform their business
• It is seen as taking a bold step

What is the driving purpose for a manager to choose to merge with or a acquire another company?

• improve the performance of a current business model – increase prices or improve cost positioning. This is called the “leverage my model” method.
• fundamentally transform the business – expand to new markets, go after new customers. This is called the “reinvent my model” method

The two purposes are fundamentally different

Reinvent my model transaction:

• proven success example is when Best Buy acquired the Geek Squad. It was successful because it was a fundamentally different model in the store that gave them a new revenue stream but also supported the overall value proposition that they were offering to customers

Leverage my model transaction:

• This is when a company is acquiring a set of resources that further strengthen existing models. You see this a lot of times in Pharma companies.

The Challenge:

• Thinking through what are the specific resources to plug in, and are they pluggable? Companies usually get this wrong

What to do to avoid failurein merging with or acquiring a company:

• Evaluate the type of transaction
• Make sure the characterization is correct
• Ask the question: Is the merger or acquisition supporting the overall value proposition that is offered to the customers?

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