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What constitutes a failure in M&A?
Simply put, value destruction.
At DealRoom, we’ve hosted hundreds of successful deals. From our perspective, if the ultimate goal of M&A is value creation, the opposite has to be the destruction of it.
There’s more than one way to destroy value, as the list which follows will testify. On this list alone, the best part of US$200 billion was blown on acquisitions which failed.
Just think of where some of these companies could have better invested that money.
Before we dive into each case, I should mention here our other blogpost about successful acquisition examples here.
To those familiar with lists like these, the presence of AOL and Time Warner at the top of this list will come as little surprise.
Speaking about M&A failures and not mentioning this transaction would be like interviewing Neil Armstrong and not mentioning the moon.
The managers behind this deal were rushing to get into new media, without truly understanding the dynamics of the new media landscape.
Without an understanding of the landscape, the danger existed that the participants would overpay. And so they did.
A year after the deal, the company reported a write-down of US$99 billion - the largest annual net loss ever reported.
The Daimler-Benz and Chrysler is regularly used by MBA courses as the textbook example of how culture clashes will inevitably lead to the failure of a deal.
It has been said in some quarters that the two cultures were too different to ever be brought together.
Decision making at Daimler-Benz was methodical, at Chrysler it was creative and unstructured; salaries at Daimler-Benz were conservative, much less so at Chrysler; finally, there was the flat hierarchy that existed at Chrysler compared to the top-down structure at Daimler-Benz.
The upshot?
Within a decade, Daimler had sold 80% of Chrysler to Cerberus Capital Management for US$7 billion - a US$20 billion poke in the eye to anyone that says culture doesn’t matter.
When Google made its move for Motorola in 2012, to many, a transaction between the two made perfect sense from a strategic perspective: Google’s Android operating system was already the second biggest player in the market, and acquiring Motorola would give it the opportunity to develop high-quality mobile handsets.
But this second part of the equation - making high-quality handsets - has been the undoing of dozens of companies in the telephony industry.
The same awaited Motorola. Google thought so poorly of its new handsets that it contracted others, including Samsung and LG, to develop its Nexus handsets. In 2014, Motorola was divested for just US$2.9 billion.
For Google and Motorola in 2012, read Microsoft and Nokia a year later in 2013. With smartphones, and shortly after tablets, slowly beginning their rise to ubiquity, it was vogue for the biggest players in technology to announce that they would soon be producing their own handset devices.
And it seemed like they all viewed the short-cut to achieving this being acquiring an existing handset maker. In Microsoft’s case, this was Nokia.
Although once the world’s biggest handset manufacturer, Nokia had failed to keep up with developments. By the time it closed down in 2015, Microsoft had written off US$7.6 billion and laid off over 15,000 Nokia employees.
Economies of scale are one of the reasons that are cited for many transactions in M&A, but economies of scale are not an end in themselves. You can take two fading companies, like KMart and Sears Roebuck, merge them, and you’ll have an even bigger problem than the one you started with.
The combined Sears Holdings, was the third biggest retailer in the United States at the time of the deal, but e-commerce was just about to take-off.
It also coincided with a series of cuts at Sears Holdings, at a time when it probably needed investment in stores, inventory and an online strategy, more than ever. It filed for bankruptcy in 2018 after 125 years in existence.
It’s interesting how many of the worst M&A failures of all time happen around the same period: the changeover to digital and how many dealmakers failed to understand the dynamics of the changeover.
Another such example is provided by eBay’s acquisition of Skype. The theory was that this would allow communication between buyers and sellers on eBay, smoothing transaction flow and generating more revenue - beautiful synergies.
What eBay didn’t bargain for was that people don’t really want to talk to strangers about transactions if they can just email them. eBay soon saw there was no real need for the acquisition and ended up selling two thirds of Skype for US$1.9 billion just four years later.
It seems bizarre now, but when Bank of America acquired Countrywide at the beginning of 2008 for a price of “just” US$2 billion, many thought it was a shrewd investment.
Even though every economic indicator in the United States was already pointing downward, the deal in theory stood to combine the country’s biggest retail bank with its biggest mortgage provider.
This does have a ring to it. The issue is that what constituted ‘mortgage’ in the first decade of the 21st century in the United States was yet to become apparent.
Bank of America had basically acquired bad debt for US$2 billion. It ultimately ended up paying US$50 billion for the acquisition, making one wonder where the financial due diligence was when it was needed most.
How could anybody not get behind a deal that was billed as ‘Barbie meets Carmen Sandiego’?
That was one of the premises behind Mattel acquiring the Learning Company in 1998.
Sensing a move away from traditional toys towards video game consoles, Mattel felt that the Learning Company would give it a software platform to build on.
Even the CEO of the Learning Company said of the deal at the time: “the lines of distinction between consumer software and toys begin to grey or blur when you get out past two years.’
It was telling that he also thought of a completely interactive children’s plush toy but wouldn’t commit to how long it would take to arrive on the market.
Just two years later, Mattel sold the Learning Company for about a tenth of what it bought it for, with no strategy, no products and no synergies to show for the acquisition.
What do all of these deals have in common?
A narrative. It’s easy to sell the idea of a retail bank buying a mortgage provider, a traditional toy maker merging with a technology platform or a software maker buying a handset maker to shareholders.
But a narrative isn’t enough. You can overpay for a company which may even be a good fit (AOL/Time Warner), misunderstand the dynamics of a market (Google and Nokia) or simply not perform enough due diligence (Bank of America and Countrywide).
Avoiding M&A failures means paying more attention to details like these and less to the grand narrative behind the deal.
What constitutes a failure in M&A?
Simply put, value destruction.
At DealRoom, we’ve hosted hundreds of successful deals. From our perspective, if the ultimate goal of M&A is value creation, the opposite has to be the destruction of it.
There’s more than one way to destroy value, as the list which follows will testify. On this list alone, the best part of US$200 billion was blown on acquisitions which failed.
Just think of where some of these companies could have better invested that money.
Before we dive into each case, I should mention here our other blogpost about successful acquisition examples here.
To those familiar with lists like these, the presence of AOL and Time Warner at the top of this list will come as little surprise.
Speaking about M&A failures and not mentioning this transaction would be like interviewing Neil Armstrong and not mentioning the moon.
The managers behind this deal were rushing to get into new media, without truly understanding the dynamics of the new media landscape.
Without an understanding of the landscape, the danger existed that the participants would overpay. And so they did.
A year after the deal, the company reported a write-down of US$99 billion - the largest annual net loss ever reported.
The Daimler-Benz and Chrysler is regularly used by MBA courses as the textbook example of how culture clashes will inevitably lead to the failure of a deal.
It has been said in some quarters that the two cultures were too different to ever be brought together.
Decision making at Daimler-Benz was methodical, at Chrysler it was creative and unstructured; salaries at Daimler-Benz were conservative, much less so at Chrysler; finally, there was the flat hierarchy that existed at Chrysler compared to the top-down structure at Daimler-Benz.
The upshot?
Within a decade, Daimler had sold 80% of Chrysler to Cerberus Capital Management for US$7 billion - a US$20 billion poke in the eye to anyone that says culture doesn’t matter.
When Google made its move for Motorola in 2012, to many, a transaction between the two made perfect sense from a strategic perspective: Google’s Android operating system was already the second biggest player in the market, and acquiring Motorola would give it the opportunity to develop high-quality mobile handsets.
But this second part of the equation - making high-quality handsets - has been the undoing of dozens of companies in the telephony industry.
The same awaited Motorola. Google thought so poorly of its new handsets that it contracted others, including Samsung and LG, to develop its Nexus handsets. In 2014, Motorola was divested for just US$2.9 billion.
For Google and Motorola in 2012, read Microsoft and Nokia a year later in 2013. With smartphones, and shortly after tablets, slowly beginning their rise to ubiquity, it was vogue for the biggest players in technology to announce that they would soon be producing their own handset devices.
And it seemed like they all viewed the short-cut to achieving this being acquiring an existing handset maker. In Microsoft’s case, this was Nokia.
Although once the world’s biggest handset manufacturer, Nokia had failed to keep up with developments. By the time it closed down in 2015, Microsoft had written off US$7.6 billion and laid off over 15,000 Nokia employees.
Economies of scale are one of the reasons that are cited for many transactions in M&A, but economies of scale are not an end in themselves. You can take two fading companies, like KMart and Sears Roebuck, merge them, and you’ll have an even bigger problem than the one you started with.
The combined Sears Holdings, was the third biggest retailer in the United States at the time of the deal, but e-commerce was just about to take-off.
It also coincided with a series of cuts at Sears Holdings, at a time when it probably needed investment in stores, inventory and an online strategy, more than ever. It filed for bankruptcy in 2018 after 125 years in existence.
It’s interesting how many of the worst M&A failures of all time happen around the same period: the changeover to digital and how many dealmakers failed to understand the dynamics of the changeover.
Another such example is provided by eBay’s acquisition of Skype. The theory was that this would allow communication between buyers and sellers on eBay, smoothing transaction flow and generating more revenue - beautiful synergies.
What eBay didn’t bargain for was that people don’t really want to talk to strangers about transactions if they can just email them. eBay soon saw there was no real need for the acquisition and ended up selling two thirds of Skype for US$1.9 billion just four years later.
It seems bizarre now, but when Bank of America acquired Countrywide at the beginning of 2008 for a price of “just” US$2 billion, many thought it was a shrewd investment.
Even though every economic indicator in the United States was already pointing downward, the deal in theory stood to combine the country’s biggest retail bank with its biggest mortgage provider.
This does have a ring to it. The issue is that what constituted ‘mortgage’ in the first decade of the 21st century in the United States was yet to become apparent.
Bank of America had basically acquired bad debt for US$2 billion. It ultimately ended up paying US$50 billion for the acquisition, making one wonder where the financial due diligence was when it was needed most.
How could anybody not get behind a deal that was billed as ‘Barbie meets Carmen Sandiego’?
That was one of the premises behind Mattel acquiring the Learning Company in 1998.
Sensing a move away from traditional toys towards video game consoles, Mattel felt that the Learning Company would give it a software platform to build on.
Even the CEO of the Learning Company said of the deal at the time: “the lines of distinction between consumer software and toys begin to grey or blur when you get out past two years.’
It was telling that he also thought of a completely interactive children’s plush toy but wouldn’t commit to how long it would take to arrive on the market.
Just two years later, Mattel sold the Learning Company for about a tenth of what it bought it for, with no strategy, no products and no synergies to show for the acquisition.
What do all of these deals have in common?
A narrative. It’s easy to sell the idea of a retail bank buying a mortgage provider, a traditional toy maker merging with a technology platform or a software maker buying a handset maker to shareholders.
But a narrative isn’t enough. You can overpay for a company which may even be a good fit (AOL/Time Warner), misunderstand the dynamics of a market (Google and Nokia) or simply not perform enough due diligence (Bank of America and Countrywide).
Avoiding M&A failures means paying more attention to details like these and less to the grand narrative behind the deal.
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