Friday, March 30, 2012

Google's Mythical Merger Success Rate

Google Claims A 70% Acquisition Success Rate?

A recent Xconomy article about Google’s acquisition strategy grabbed my attention, because in it Google claimed a whopping “70% success rate.” According to a recent McKinsey report though, “Anyone who has researched merger success rates knows that roughly 70% of mergers fail.” Google's statement is less surprising when one examines their definition of acquisition failure from later in the article, “The company’s definition of failure? When the acquired firm’s technology doesn’t get incorporated into a Google product and the company sunsets it, or the team eventually leaves, or both.” Note that there is no mention of profitability or shareholder value creation. Accordingly, I think that Google’s 70% success rate is due more to their lower standard of success, than to process superiority.

Google may not worry about profits or creating shareholder value because their scarce resource is talent, and ‘acqui-hires’ are one way to accomplish that. Companies merge for a variety of reasons: expansion of market share, acquisition of new lines of distribution or technology, or reduction of operating costs. I suppose a criterion beyond shareholder value creation may be required for Google because they acquire so many startups, and the acquired companies are often too small to impact share price. 

Merger Success Statistics Summary

Even though I suspect that Google’s success rate is inflated, I still wanted to refresh my understanding of merger success. I remember being struck as an undergrad by a pie chart which showed that approximately a third of mergers destroyed value, a third didn't accomplish anything, and then of the value creating mergers only a portion of the value creating mergers did so significantly. I wasn't able to turn up that chart, but I did find the following statistics:
  • 70% Failure Rate: McKinsey:“Anyone who has researched merger success rates knows that roughly 70% of mergers fail.”
  • 70% Failure Rate: A 2004 study by Bain & Company found that 70 percent of mergers failed to increase shareholder value.
  • 90% Failure Rate in Europe: A 2007 study by Hay Group and the Sorbonne found that more than 90 percent of mergers in Europe fail to reach financial goals.
  • Failure Exceeds 50%: "If the definition of a successful merger is driving up shareholder value, then their failure rate is far north of 50 percent," says Lawrence Chia, a managing director of Deloitte & Touche in Beijing, China.
  • Failure Exceeds 50%: In Merrill DataSite’s survey of 100 worldwide executives, the majority said that mergers are successful 26%-50% of the time in their experience. 

Reasons For Failure

Assuming that mergers are intended to increase shareholder value, there are many headwinds to overcome before shareholders benefit.
  • Shareholder Dilution: “…when one company acquires another using its own stock as currency, as commonly happens today, shareholders' stakes in the acquiring firm typically decline.”
  • Cost of Golden Parachutes: “Company executives can pocket up to 8% of the merger proceeds” according to Michael S. Kesner of Deloitte Consulting. 
    • Executive stock options vest immediately in the event of a merger. 
  • Inaccurate estimation of synergies: The McKinsey report cites 32% of merged companies saying their synergy estimates were inaccurate. 
  • Integration Risk
  • Bain Indicators of Failure: 
    • Billion Dollar Price Tag
    • Mergers of Equals
    • Hostile Mergers
    • Moves into a new line of business 

Best Practices for Merger/Acquisition

  • Google: Only buy companies that are "directly aligned with your business."
  • Bain: Stay close to the core business.
  • Google: Only buy a company "if your resources will allow it to become something bigger."
  • IBM: Buy companies that will benefit from your distribution network and customer relationships. 
  • Bain: "It turns out that frequent acquirers that build skills and experience through a host of small deals come out on top."
  • Bain: "The average deal size for the winners in our study was 10% of the acquiring firm's market cap."
  • Bain: Only pursue friendly deals.
  • Bain: Only pursue deals that are easy to justify, because it the benefit must be direct to succeed.
  • Buy companies that are significantly smaller so there is no question which culture will dominate.
  • Begin planning for integration while due diligence is occurring. 
  • Quantify executive compensation during due diligence because it can dwarf synergies. 
  • Be prepared to devote substantial executive effort to human capital and cultural issues.
  • Make headcount decisions quickly following the merger announcement to create certainty for employees. Otherwise, productivity will plummet.
  • Cross continent mergers are more likely to fail than domestic mergers.



Citations


“What Are Mergers Good For?” By Gretchen Morganstern. The New York Times. June 5, 2005. 


 “Mergers Fail More Often Than Marriages.” By Kevin Voigt. CNN.com May 22, 2009. http://edition.cnn.com/2009/BUSINESS/05/21/merger.marriage/index.html

“Post Merger Integration: The Key To Successful Mergers and Acquisitions.” By Merrill Datasite. June 2009. http://www.datasite.com/cps/rde/xbcr/datasite/WP_PMI_mm_June_2009.pdf 

 “Beyond Risk Avoidance: A McKinsey Perspective on creating transformational value from mergers.” By James McCletchy and Andy West. Perspectives on Merger Integration. June 2010. Published by McKinsey and Company. Pg. 11.

http://www.bain.com/publications/articles/mega-merger-mouse-trap-wall-street-journal.aspx

http://www.haygroup.com/ww/press/Details.aspx?ID=7276