Q&A - Why do acquisitions often fail to deliver acceptable returns?

It is widely accepted that over 50% of takeovers destroy shareholder value – i.e. they do not earn a return (higher profits) that justify the investment made. Why is this?

There are many potential reasons why an acquisition fails to deliver the required or expected returns on investment:

• The price paid for acquisition was too high (over-estimate of synergies).
• Lack of decisive change management in the early stages
• The takeover was mishandled
• Cultural incompatibility (often the case in cross-border acquisitions)
• Poor communication
• Loss of key personnel & customers post acquisition
• The creation of a lumbering giant that is soon outpaced by smaller rivals

Acquisitions therefore provide some important change management challenges. Not only are they relatively risky actions (certainly compared with internal or organic growth), but the risk is heightened if the change management issues are not addressed before, during and after the acquisition.

A fundamental challenge posed by an acquisition is one of corporate culture. Various stakeholders in the acquired firm face great uncertainty following an acquisition. For example:

Employees - e.g. uncertainty about acquirer intentions & strategy (cost savings, rationalisation)
Customers & suppliers - e.g. continued relationship; impact on quality
Management (of acquired business) - e.g. duplicated roles, new hierarchy