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Six Signs of a Bad Acquisition

Jennifer Openshaw

That may be OK, although in the case of publicly held corporations, I wouldn't mind seeing a little more of that cash returned to Millionaire Zone investors.

Any time I see a feeding frenzy in the markets, I start to wonder. And when I think back on previous M&A activity, I see a lot of bloopers. The recent dismantling of Daimler-Chrysler (DCX) got me thinking -- couldn't we have seen this coming? And AOL-Time Warner (TWX) and others?

The real question in any acquisition is this: Is value being created, or is it being destroyed? Here are some factors to consider.

• Pieces just don't fit together. Culture and process clashes really came home to roost in the Daimler-Chrysler fiasco and were most likely there when dot-commer AOL took over the established media giant Time Warner. (I would have loved to have been a fly on the wall in some of those conference rooms!)

  The tech business is rife with culture clashes, most vividly exposed with Texas-based Compaq's acquisition of New England's Digital Equipment, followed by West Coast Hewlett-Packard's (HPQ) acquisition of both. Overcoming these style discrepancies became a big challenge.

  There has been occasional talk about Coca-Cola (KO) buying Starbucks (SBUX). Would it work?

  Well, they're both in the beverage industry, but that's where the similarities end. Starbucks distributes directly through specially crafted, company-owned outlets, while Coke gets to its customers in packages through a complex, multitiered mass-distribution channel.

  Also, Starbucks appeals more to upscale customers, while Coke appeals to the masses -- more on that below.

Click here for the video version of this story from Jennifer Openshaw.

• Assimilation takes too long -- or not long enough. From its stated plans, it appeared that Daimler-Chrysler would take years to combine all assets and management teams, and it never really happened. On the other hand, some combinations happen too fast. In these cases, the acquiring company is simply disposing of assets, not integrating the best of the acquired company into its business.

  I look for a time frame of about a year. Anything more is too long, anything less is too short, and both will erode value.

• Upscale acquires mainstream, or vice versa. Daimler, an upmarket name, acquired Chrysler, a mainstream name at best. Do upscale companies know how to market mainstream products? Aren't the cultures likely to clash somewhere? Ford (F) and Jaguar have the same issue.

  Marriott's (MAR) acquisition of the tony Ritz Carlton chain goes the other direction. So far it seems to be working out, but only as a result of an exceptional management team -- and I'm sure culture wars have happened behind closed doors there, too.

• No strategy. Mergers just to get bigger and increase scale often don't work. Cost-cutting is not a strategy. We saw a lot of this "strategy" as a rationale for H-P's $18 billion acquisition of Compaq, although there were probably deeper strategic benefits that management just wasn't talking about. And especially in the tech space, there's a temptation to revive dinosaurs -- we see it with Sun Microsystems (SUNW) and Storage Technology, and Alcatel-Lucent (ALU).
• Too much goodwill. Goodwill is the accountant's way of questioning an acquisition. Large goodwill increases suggest there wasn't enough tangible value or that the acquirer paid too much. When newspaper and media player McClatchy (MNI) acquired Knight-Ridder, goodwill increased $2 billion, and so did long-term debt -- not a good combination.
• Lost brands. Occasionally the acquiring company is so focused on its own brand and business that it loses focus on the brand and business value of the acquiree.

  The 1980s BP (BP) acquisition of Standard Oil of Ohio (Sohio) was a case in point. Ohioans and other Midwesterners trusted the Sohio brand and considered it one of their own, while BP was an outsider and was treated that way. J.P. Morgan Chase (JPM) probably also lost some respecting customers when it ditched the Bank One brand.

So remember, not every acquisition works; it's hard to get the most value out of both companies. You have to look at both the big picture and the details.