Deals From Hell

Posted on: December 9th, 2011 by
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by Robert F. Bruner

One of the problems with books of historical case studies is a lack of general principles, and a feeling that the authors are looking in the back of the book for the answers. The post-mortems don’t really offer any guidance for the pre-mortem. A book like Thinking In Time, popular with the public administration crowd, seems too clever by half, proving the importance of judgment without helping much to develop it. It compares the handling of two different potential epidemics, but which one applies to the Bird Flu?

This is one reason that case studies are popular in business schools, but also seem to fall short of the goal. Since you’re obviously supposed to evaluate the case in light of the reading, after three years they seem more like a game than like real life.

An exception to this rule is Robert F. Bruner’s Deals From Hell, an examination of why M&A deals fail.

Robert F. Bruner, a professor specializing in the subject at Virginia’s Darden Graduate School of Business, presents the material systematically, if somewhat dryly. Bruner believes that M&A activity is usually successful, as opposed to the oft-made claim that 50%-80% of M&As fail. He argues in the introduction that the deals most likely to garner attention are also those most likely to fail: stock deals, for public companies, in hot markets, where the buyer is expecting too much from the deal. In fact, most M&A activity takes place among privately-held firms, where success is more likely but hidden.

The book lays out what Bruner believes to be the six most important factors in deal failure, and then proceeds to apply them to all ten cases. They are: complexity (both in deal structure and in operations), tight coupling (allowing trouble to spread through the company), flawed assumptions of business-as-usual, conceptual bias in management, poor choices, and a poor cultural fit.

The net effect is that of a buyer biting off more than it can chew. It finds itself dealing with changing business conditions at a time when its energies are absorbed by personnel issues, and its ongoing operations are disrupted. If it puts off integrating operations, the combined companies may not see the returns on investment they had expected.

There are ways to avoid these monsters. Creativity in financing can create incentives for management teams to work together. Not getting swept up in a hot market can avoid the massive overpayments (and up-front stresses on the buyer’s finances) evident in almost all of these deals. The buyer should almost never look at the seller as its savior – that leads to almost all of the six factors.

Perhaps most importantly, executives need to remember that the only growth that matters is in economic value. All those other measures – returns, cash flow, profit margins, are outgrowths of well-run businesses adding economic value. Growing the company by acquisition alone isn’t sustainable, and it encourages executives to venture further and further afield from their own Hedgehog Concepts. Executives need to see acquisitions as part of a growth and company strategy, an admonition ignored almost as often as it’s made.

Each case illustrates all six weaknesses, but emphasizes two or three. The only case I’d object to is the proposed Dynegy-Enron merger, since by this time in Enron’s life-cycle, their business model was inseparable from their fraud, overwhelming other aspects of the case.

One questionable detail from the introduction was his assertion that mergers between equals might be more successful, speeding the integration process. This would contradict both the rest of his book and actual experience. Jack Welch argues in Winning that there really is no such thing as a merger among equals; that the term is crafted to keep feelings from being hurt; that one side is always stronger in reality, and that hiding that fact just postpones the inevitable and necessary restructuring. Indeed, Bruner’s own well-documented assertion that a company should buy from strength and not to address fundamental weaknesses would also undermine the MOE concept.

But this is a detail, and hardly detracts from the rest of the work. Bruner’s writing is a little dry, but not repetitive or convoluted. The charts and graphs are tailored to the point, and not repeated on every case. And the book is well-edited; I never found myself flipping back and forth, or noting that I had just read the same sentence.

Deals From Hell contributes not only to understanding M&A activity, but also to the genre of Don’t Make This Mistake for Leaders. By giving the would-be analyst a structure within which to analyze prospective deals (and another set of criteria to evaluate failure or success), he gives some direction to that judgment.


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