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and Acquisitions - Other Problems
These general problems may be encountered in many
acquisitions. However, there are
many other causes of the poor long-term performance of acquisitions. In fact, some of the reasons for poor
long-term performance also may lead to the problems already discussed.
Companies experience transaction costs when using acquisition
strategies to create synergy. Direct costs include legal fees and charges from
investment bankers. Managerial time to evaluate target companies and then to
complete negotiations and the loss of key managers and employees
post-acquisition are indirect costs.
While the average return to acquiring company shareholders is
near zero, many acquisitions result in negative returns. And, many previously
consummated acquisitions may be undone (through restructuring) because of poor
performance. Some of the factors--or indirect costs--believed to cause poor
long-term performance of acquisitions are given below:
5)
Too Much Diversification
In the drive to diversify the company's product line, many
companies overdiversified. As a
result of overdiversification, companies may have become overly complex and, as
and a result, too difficult to manage effectively. Excess or overdiversification
is not universal. It is dependent
upon two factors: 1) managerial expertise and 2) type of diversification.
Information processing requirements are much higher for a
related diversified company (compared to its unrelated counterparts) due to its
need to effectively and efficiently coordinate the linkages and
interdependencies upon which value-creation through activity sharing depends. In
addition to increased information processing requirements and managerial
expertise, overdiversification may result in poor performance when top-level
managers emphasize financial controls over strategic controls. Financial
controls may be emphasized when managers feel that they do not have sufficient
expertise or knowledge of the company's various businesses. When this happens,
top-level managers are not able to adequately evaluate the strategies and
strategic actions that are taken by division or business unit managers. As a result, Top-level managers tend to
emphasize the financial outcomes of strategic actions rather than the
appropriateness of the strategy itself. This forces division or business unit
managers to become short-term performance-oriented. The problem becomes more serious when managers' compensation
is tied to achieving short-term financial outcomes. Long-term, risky investments (such as R&D) may be reduced to
boost short-term returns. In the
final analysis, long-term performance deteriorates.
The experiences of many companies indicate that
overdiversification may lead to ineffective management, primarily because of the
increased size and complexity of the company. As and a result of ineffective management, the company and
some of its businesses were unable to maintain their strategic competitiveness. This results in poor performance.
As noted earlier in this chapter, acquisitions can have a
number of negative effects. They may result in greater levels of diversification
(in products, markets, and/or industries), absorb extensive managerial time and
energy, require large amounts of debt, and create larger organizations.
As a result, acquisitions can have a negative impact on investments in research
and development and thus on innovation.
Reducing the emphasis on R&D and on innovation may result in
the company losing its strategic competitiveness unless the company operates in
mature industries in which innovation is not required to maintain strategic
competitiveness. Companies can implement acquisition strategies to extend the
scope of the company. When this happens, companies may view acquisitions as and
a substitute for innovation. But, this can negatively affect their strategic
competitiveness. As companies extend their scope by acquisitions rather than by
innovation, they may see acquisitions as a cure whenever they encounter stronger
competition or lose their strategic competitiveness in some markets. They respond by making further acquisitions, developing fewer
innovations, and then reinforce the cycle by making additional acquisitions. As and a result, long-term performance
suffers.
6)
Managers Overly Focused on Acquisitions
If companies follow active acquisition strategies, the
acquisition process generally requires significant amounts of managerial time
and energy. For the acquiring company
this takes the form of searching for viable candidates, completing effective due
diligence and preparing for negotiations with the target company.
The last two steps--due diligence and negotiating with the
target--often include numerous meetings between representatives of the acquirer
and target, as well as meetings with investment bankers, analysts, attorneys,
and in some cases, regulatory agencies. As a result, top-level managers of
acquiring companies often pay little attention to long-term, strategic matters
because of time (and energy) constraints.
At the target company,
top-level managers generally become involved when they become aware that their
company is an acquisition target.
At that point, their attention often becomes focused primarily on
acquisition-related matters, like negotiating with the acquirer (often after
meetings with the target company's board of directors, attorneys and investment
bankers) to maximize shareholder value, developing strategies to ensure ongoing
employment for key staff members (including top level executives) and responding
to queries from shareholders, employees, the media, and in some cases,
regulatory agencies, customers, and suppliers.
This may divert managers' attention from other critical
matters. In fact, top-level
managers--and other managers--of target companies often find themselves in a
state of limbo. Normal operations
continue, but long-term commitments are delayed or put off until either the
negotiation process is completed or, in some cases, until the merger has been
consummated. Some of this tendency
on the part of target company executives to delay or postpone major decisions is
a fear of being evaluated negatively by the acquiring company and laid off when
the acquisition is consummated.
The downside to this short-term focus (and the strong
potential for layoffs from target companies that appears to accompany
acquisitions) may be that valuable managerial experience is lost and talented
individuals engaged in product development or R&D may leave. As a result of the
tremendous demands on managerial time and energy, both acquiring and target
companies may adopt short-term perspectives, delaying critical long-term
decisions related to R&D or capital expenditures.
And, this may harm the long-term strategic competitiveness of the combined
company.
7)
Too Large
In the vast majority of cases, acquisitions result in
acquirers increasing in size even after some of the acquired company's assets
are sold. As you may recall from
previous management and/or economics courses, increasing the size of the company
should be a positive move because it enables the company to achieve economies of
scale and, as a result, develop more efficient operations. However, it also is
possible that companies can be too large. After some point is reached, problems
related to excess size may outweigh the benefits.
In other words, companies can reach economies of scale by
growing. But, after a certain size
is achieved, size can become a disadvantage as companies reach a point where
they suffer from what might be called "diseconomies
of scale." This implies that
problems related to excess growth may be similar to those that accompany
overdiversification.
Other actions taken to enable more effective management of
increased company size include increasing or establishing bureaucratic controls,
represented by formalized supervisory and behavioral controls such as rules and
policies that are designed to ensure consistency across different units'
decisions and actions. On the surface (or in theory), bureaucratic controls may
be beneficial to large organizations. However, they may produce overly rigid and standardized
behavior among managers.
Establishing and implementing more formalized (bureaucratic) and centralized
control systems in acquired companies is not that uncommon. In fact, such
control systems may be used to help facilitate the integration of acquiring and
acquired companies. But as noted previously, bureaucratic controls may reduce
managerial (and company) flexibility, which can result in reduced levels of
innovation and less creative (and less timely) decision making.
The seven reasons for poor performance of acquisitions or
problems faced in attempts to achieve success are:
integration difficulties
inadequate evaluation of target
large or extraordinary debt
inability to achieve synergy
too much diversification
managers overly focused on acquisitions
too large