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Hope for the Best, Plan for the Worst
The great Chinese general Sun Tzu could have been speaking of mergers and acquisitions (“M&A”) when he made his famous statement about winning a battle and losing the war. Statistics show that a majority of U.S. M&A deals ultimately fail; in short, for many deals it turns out that one plus one adds up to something less than two. For example, in a 2007 study of 3,200 transactions between 1992 and 2006, the Boston Consulting Group concluded that around 60% of deals reduced shareholder value. (See Kees Cools et al., The Brave New World of M&A: How to Create Value from Mergers and Acquisitions, BOSTON CONSULTING GROUP, June 2007, available at www.giddy.org/appliedfinance/ufkl/Brave_New_World_MA_Aug_2007.pdf). Why is it that M&A often leads to a loss in shareholder value despite exhaustive due diligence (and ever-growing document reviews) and careful negotiation of the acquisition and ancillary documents? Part of the explanation for the failure of M&A transactions to yield expected benefits is poor or non-existent post-acquisition integration planning.
As an initial matter, many companies may not recognize that integration planning begins during the due diligence phase. Specifically, companies should use their pre-acquisition due diligence to begin shaping their views about how to incorporate the new business ' warts and all ' into the acquirer. Conversely, when integration planning is neglected, even the most promising ventures may fail. For instance, in July 2005, NewsCorp acquired MySpace for $580 million, hoping to capitalize on the social media network's 100 million monthly users. However, NewsCorp apparently failed to ensure MySpace had the resources to retain its competitive position, and eventually sold the company to Specific Media for a mere $35 million. Among cited reasons for MySpace's diminution in value after NewCorp's takeover were poor management, unreasonable pressure to hit revenue targets, lack of resources, and poor public relations ' all problems that could have potentially been avoided with better integration planning. (See Brian Stelter, News Corporation Sells My-
Space for $35 Million, June 29, 2011, N.Y. Times). Similarly, in a deal characterized as “one of the worst technology transactions of the decade,” eBay acquired Skype in 2005 for $3.1 billion, hoping to offer customers the ability to discuss their transactions in real time. When it became clear that Skype lacked synergy with eBay's main e-commerce and online payment businesses, eBay wrote down $900 million of Skype's value and sold the company for $2.75 billion. (See Brad Stone, Ebay is Said to Have Deal to Sell Skype, Sept. 1, 2009, N.Y. Times).
The loss in value from the failed Skype and MySpace acquisitions highlights the need for comprehensive integration planning in the due diligence phase. Companies can better handle the unexpected challenges during the integration phase by ensuring the right management and process tools are in place.
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