M&A: The One Thing You Need to Get Right

The financial world set a record in 2015 for mergers and acquisitions. It’s too soon to have data on how those deals will work out, but the signs are not promising. Last year Microsoft wrote off 96% of the value of the handset business it had acquired from Nokia in 2014 for $7.9 billion. The rule, confirmed by nearly all studies, remains true: M&A is a mug’s game, in which some 70% to 90% of acquisitions are abysmal failures. The author has an explanation for this persistent failure and offers a way forward. Acquirers, he notes, tend to look at acquisitions as a way of obtaining value for themselves—access to a new market or capability.

The trouble is, if you spot a valuable asset or capability in a company, others will too, and the value will be lost in a bidding war. But if you have something that will make the acquisition more competitive, the picture changes. As long as the acquired company is incapable of making that enhancement on its own or (ideally) with any other company, the buyer, rather than the seller, will earn the rewards. Martin describes four ways to enhance the competitiveness of a target:

• Be a smarter provider of growth capital.
• Provide better managerial oversight.
• Transfer valuable skills to the acquisition.
• Share valuable capabilities with the acquisition.