It's been hard to find silver linings in any of the current economic storm clouds, but several recent deals have reminded me that silver linings do exist. They illustrate that during bad times, astute executives can make relatively inexpensive, opportunistic deals that will prepare their organizations for the better times that will inevitably return. Cases in point: Wells Fargo's (WFC) acquisition of Wachovia Bank at a relatively bargain price, and Oracle's (ORCL) decision to purchase Sun Microsystems.
As these two examples illustrate, a declining market creates more opportunities for making acquisitions at lower prices and expanding into areas that had previously been considered off-target. Yet one of the challenges for leaders considering making acquisitions in this climate is finding the courage to act against the herd. When the emphasis is on preserving cash, an acquisition may feel like an unwarranted risk. And for companies in danger of a liquidity crisis, acquisitions probably are a step too far.
However, for companies with a solid cash position the range of assets that are currently available and the prices at which they can be acquired offer huge potential for creating value now and into the future. Whenever my Accenture colleagues and I counsel clients exploring potential mergers or acquisitions, we remind them that many studies confirm that up to half of all deals have destroyed value for the acquiring company. There are two primary reasons for this: failure to deliver the synergies foreseen as part of the deal, and overpaying. Both of these problems are particularly acute in a rising market, but less so in a falling market.
In the latter case, synergy estimates are typically more conservative and easier to achieve. Companies are expecting change and are prepared to accept the more rigorous approach to cost management that is required to deliver the synergy savings. Nevertheless, the need to find those synergies—to eliminate redundancies and cut costs—remains even when the acquisitions are relatively inexpensive.
The Cost of Waiting Too Long
Purchasers in a falling market do wrestle with the fear of overpaying if asset values are likely to fall further. In the current market, with high levels of uncertainty about both asset values and currencies, doing deals feels risky. But we advise our clients that the greater risk could be waiting until the market hits bottom, when the assets in question may have deteriorated through the loss of key customers or employees.
Despite the recent decline in M&A activity compared to the boom year of 2007, we counsel our clients in many industries that the logic for consolidation remains strong. Economies of scale, the need to serve global customers everywhere they operate, and the opportunity to access new skills or leverage unique capabilities across a wider market all remain compelling reasons to pursue growth strategies through M&A. Indeed, the market realities of the multipolar world continue to dominate decision-making by multinational companies.
The enduring growth differential between emerging and mature markets allows companies that operate in both worlds to deliver better returns. Traditional competitors focused exclusively on the highly developed but lower-growth markets of the West will experience lower growth in the coming years. They are at risk of losing their edge in competition as more dynamic companies serving the rapidly changing needs of the emerging middle class in countries such as China and India. Despite the allure of distress sales, low prices should not be the driving factor in any acquisition program. We advise all of our clients contemplating acquisitions to bear in mind the critical success drivers for M&A:
1. Have a clear strategy. Buying companies is not like going to the January sales and picking up things you don't really need because they're cheap.
You need to be clear on what you need and how a specific acquisition fits into your overall strategy.
2. Do your homework. High-quality due diligence is critical to success. Researching all aspects of the prospective target is an opportunity to prepare more effectively for integration. In our experience the most effective due diligence looks forward rather than backward, identifies the key drivers of profitability within the target environment, and develops a realistic projection of how those drivers will impact future performance.
3. Execution. Execution. Execution. This is the key to extracting value from acquisitions. Synergies don't deliver themselves. They require carefully orchestrated efforts, strong leadership, coordination across multiple workstreams, and effective change management to generate long-term value in large scale acquisitions.
Although it may seem difficult for management to seize new opportunities when so much attention is focused on securing assets and fixing problems in the middle of a widespread downturn, there may never be a better time than the present to strike the deals that make the most sense for long-term success.
Mark Foster is Accenture's group chief executive—Management Consulting & Integrated Markets, with overall responsibility for the development of the company's management consulting capabilities.