Making Tough Calls on Deals - Audio slideshow with text transcript

It's a sad fact that around two-thirds of all acquisitions fail to create value for the acquirer.  Numerous studies have looked at this topic over the years, and whichever way you examine it, the success rate on deals has been shockingly low.  At Bain we do not accept that this outcome is inevitable and, indeed, have demonstrated time and time again that doing your homework before the deal is the single best investment you can make in securing a favorable outcome.

Let's look at some data. A recent survey of acquirers we conducted sought to identify the greatest sources of disappointment on deals that had recently been done.  Of the 11 factors cited by respondents, no fewer than 7 were foreseeable and preventable.  Top of the list: ignoring integration challenges and overestimating synergies.  Where have we heard that before? 

In fact, only 30% of executives are happy with the quality of diligence used to examine deals: presumably, the 30% whose deals were successful.

At Bain we value the focus on deal rationale, or investment thesis as we call it, very highly.  And shockingly, we found that only 28% of acquirers had an investment thesis-which should be the starting point for any investment-that bore out over three years.  Our point of view:  Without an investment thesis, you're flying blind.  With a flawed investment thesis, your situation is even more dangerous.

Another important reason for failure is the tacit acceptance of the robust health of and rosy outlook for the company that you're buying.  Of course the vendor's got a vested interest in putting the best light on his asset, but the tricks of the trade to polish the hubcaps have become an art form in themselves. Using such tactics, commonly called "dressing the bride" or other more colorful analogies, vendors can abandon prudent sales and accounting policies temporarily to attempt to pull the wool over the eyes of unsuspecting buyers.

So how do you avoid these bear traps?  Well, in Bain's book, there's no substitute for rigorous and disciplined analysis of the company, both internally and externally, looking beyond the accounting numbers and gaining a detailed understanding of how the company competes, how customers and suppliers view their offerings, and taking a view on the capability and competence of management. 

One of the other significant areas for failure, not getting synergies, came out very high in the list earlier on.

We propose two remedies to the failed synergy problem.  First, the recognition of the degrees of difficulty in getting synergies, from hard to soft and from easy to get to difficult to get.  That's front-end homework: being realistic about what can be done.  Just as important, however, is paying attention to detail in securing those synergies after the deal is done.  Often that task is delegated too far down the organization and supported by insufficient resources.

So, in summary, our view: Most deals can be made to be successful.  The remedies to common causes of failure are in your hands.