MERGERS & ACQUISITIONS

"More businesses die from indigestion than starvation." David Packard, founder HP

“Imagine you either as an investor or as a public company chairman owned Microsoft with a P/E of 40. In theory you could sell part of Microsoft and use the proceeds to buy a company we can call British Metal Bashing Limited with a P/E of 12. The arithmetical outcome would be a huge increase in your earnings per share. You have certainly enhanced shareholder value in the short term but have you got a better company? At this stage I am just using it to illustrate that there can be a dichotomy between short- and long-term strategies. Short-term can end up saying 'sell Microsoft'. Long-term says ' keep it'. That's the Warren Buffett approach.” David Barber, founder Halma

“Most acquisitions go awry. Not only are the synergies to which so many executives pay lip service seldom realised; more often than not the result is catastrophic. Frequently the executives of the acquired companies leave. In their stead remains only a shell and some devalued capital equipment. More important, acquisitions, even little ones, suck up an inordinate amount of top management’s time, time taken away from the main-line business.” Tom Peters, ‘In Search of Excellence’

“While deals often fail in practice, they never fail in projections – if the CEO is visibly panting over a prospective acquisition, subordinates and consultants will supply the requisite projections to rationalize any price.” Warren Buffett

“What really counts is whether a merger is dilutive or anti-dilutive in terms of intrinsic business value. We believe calculation of dilution from this viewpoint to be all-important (And too seldom made).” Warren Buffett

“Managers and directors may sharpen their thinking by asking themselves if they would sell 100% of their business on the same basis they are being asked to sell part of it [as exchange in a scrip merger/acquisition]. And if it isn’t smart to sell all on such a basis, they should ask why it is smart to sell a portion.” Warren Buffett

"I will tell you a secret: Deal-making beats working. Deal-making is exciting and fun, and working is grubby. Running anything is primarily an enormous amount of grubby detail work . . . deal-making is romantic, sexy. That's why you have deals that make no sense." Peter Drucker

“With acquisitions, patience is a virtue .. as is occasional boldness.” William Thorndike

“Two thirds of acquisitions don’t work. Ours work because we don’t try to do acquisitions — we wait for no-brainers.” Charlie Munger

“Research by McKinsey concluded that about one-third of deals create value, and the other two-thirds are value neutral or value destructive.” Michael Mauboussin

"I think the history of acquisitions is that it’s not an enormous way to wealth. Now, it has been for us, but we’re very peculiar, and luckily a lot of people don’t want to be peculiar in our way." Charlie Munger

"When we read that a company we don’t control is going to make an acquisition, I’m much more inclined to cry than to smile." Warren Buffett

“Managers who emphasize a corporate culture and explain how they do not want to dilute it with grandiose mergers always impress us.” Marathon Asset Management

“Mergers are often complicated, but they become even more difficult when the cultures are very different.” Polen Capital

“Understanding culture before we acquire a business could be the most important thing we do.” Steve Feilmeier

“One thing I’ve learned: culture matters when you’re doing M&A.” James Gorman

“A fundamental mistake I made early in my M&A career was not attaching enough priority to understanding the culture of a prospective acquisition. It’s hard, if not impossible, to make wholesale changes to a business culture. The goal is to buy companies with cultures compatible with yours so that change can happen naturally, and for the benefit of everyone, as the integration proceeds.” Brad Jacobs

“For any acquisition to be successful, the values and cultures of the two companies must be compatible. I strongly believe that you don’t convince people to accept your core values; they either believe in them or don’t believe in them.” David Luck, ABC Supply

“You get so confident about things, willing to do anything to acquire companies, but you still have to do your analysis to see, ‘Does it really fit?’ In my experience, the biggest potential problem, is always culture.” Charles Schwab

"Another important issue for us in considering an acquisition is culture. If ours is not akin to what we're acquiring, it represents a major problem. Is what they believe in similar to what we believe in? If not, we're going to have to work very hard to make it fit, and it may not be worth it.” Arthur Blank

“While acquisitions are often useful in expanding a company's technologies and gaining a quick entry into new markets, they are not without their problems. Chief among these is the difficulty in blending two cultures, operating philosophies, and management styles.” David Packard

“Most times, managements’ mistakes come about through their acquisition programs, and we’ve learned to look at those pretty closely — among many other things, but those are the most overt. Usually, the way the major acquisition programs, or mergers, or even spinoffs sometimes of divisions or subsidiaries — all the different major capital-allocation decisions that are made are part of the information that we use and act upon to make our decisions on buys and sells.” David Polen

"The most successful overall record on acquisitions has usually been made by companies that are not constantly seeking such acquisitions but that only make them very occasionally when all measurable factors seem overwhelmingly propitious, and when the acquired company is in a field closely related to the existing company's activities. The occasional deal of such a company is usually a good deal for the stockholder because the acquiring company "only does what comes naturally" and is not straining to be making "deals" all the time." Phil Fisher 1960

"The Scott Fetzer purchase illustrates our somewhat haphazard approach to acquisitions. We have no master strategy, no corporate planners delivering us insights about socioeconomic trends, and no staff to investigate a multitude of ideas presented by promoters and intermediaries. Instead, we simply hope that something sensible comes along - and, when it does, we act." Warren Buffett

“We believe most deals do damage to the shareholders of the acquiring company. Too often, the words from HMS Pinafore apply: "Things are seldom what they seem, skim milk masquerades as cream." Specifically, sellers and their representatives invariably present financial projections having more entertainment value than educational value. In the production of rosy scenarios, Wall Street can hold its own against Washington.” Warren Buffett

"Why do mergers and acquisitions carry such a high degree of risk? In almost all cases the seller, who has operated the business for years, knows much more about it and its weak spots than does the buyer." Phil Fisher

"Many acquisitions do not turn out as planned. The sellers know more than the buyers and may know of problems or uncertainties that are not apparent to the buyers." Ed Wachenheim

“A line from Bobby Bare's country song explains what too often happens with acquisitions: “I've never gone to bed with an ugly woman, but I've sure woke up with a few.” Warren Buffett

"I am very skeptical of most big mergers. The assumptions made tend to be very optimistic. People want to do deals, you start with that. There's a lot of Darwin going on in companies. And people who get to the top want action. I've been on 19 boards in my life, and I'd say the great majority of deals that I've seen were not very good deals." Warren Buffett

“The most frequent question managers ask is whether the transaction will dilute EPS over the first year or two. Given the popularity of EPS as a yardstick for company decisions, you might think that a predicted improvement in EPS would be an important indication of an acquisition’s potential to create value. However, there is no empirical evidence linking increased EPS with the value created by a transaction. Deals that strengthen EPS and deals that dilute EPS are equally likely to create or destroy value.” McKinsey Report

"In contemplating business mergers and acquisitions, many managers tend to focus on whether the transaction is immediately dilutive or anti-dilutive to earnings per share (or, at financial institutions, to per-share book value). An emphasis of this sort carries great dangers. Going back to our college-education example, imagine that a 25-year-old first-year MBA student is considering merging his future economic interests with those of a 25-year-old day laborer. The MBA student, a non-earner, would find that a “share-for-share” merger of his equity interest in himself with that of the day laborer would enhance his near-term earnings (in a big way!). But what could be sillier for the student than a deal of this kind?" Warren Buffett

“Most conglomerates fail because of financial engineering (issuing stock at 20x to buy at 10x—Buffett likened this process to a chain letter). This practice doesn’t create long term value. The key is to buy great businesses and focus on earning power, not engage in financial engineering.” John Huber

“Least successful, as a general rule, are those companies that diversify into a wide variety of fields. Acquisitions especially, among this group, tend to wither on the vine.” Thomas Peters, In Search of Excellence

"Instead of buying back shares or raising dividends, profitable companies often prefer to blow the money on foolish acquisitions. The dedicated di-worsifier seeks out merchandise that is (1) overpriced, and (2) completely beyond his or her realm of understanding. This ensures that losses will be maximised." Peter Lynch

“The fact of the matter is that, for most declining businesses, management tends to redeploy cash flow into things outside of their core competencies in a desperate attempt to save their jobs. In the case of Kodak, they took some of their patent proceeds and cash flow and invested in a printer business, which is another declining business model.” Jim Chanos

“I have had bad experience with companies making transformational acquisitions.....

An example that sticks in my mind is Thompson Creek Mining, a molybdenum miner. They bought a company with a “shovel-ready” copper and gold mine project and the cost overruns in constructing that mine ended up almost taking Thompson Creek under. What I should have asked at the time of the acquisition was, “If they don’t like the molybdenum business and are diversifying away from it, why do I own the stock?” or alternatively, “If they do like the molybdenum business, why are they diluting their exposure to it by making this acquisition?”

"Now if I see a company I own getting into a different business, even if they can spin a story of why it’s somehow related, my default position is to sell and watch what happens. More often than not those things go poorly, so if it ever does make sense to get back in, there will be a better opportunity to do so.” Jeffrey Shwartz

"The greatest chances of a costly failure occur when a merger or acquisition happens relatively quickly between two companies in quite dissimilar lines that were previously only vaguely aware of each other." Phil Fisher 1960

“The most obvious [issue is when management] invest outside their core competency. Most of us are not polymaths. Not many of us are going to be like Leonardo da Vinci. We might be good at one thing or two things and companies are the same. Once they start getting outside their core strength, you can usually feel that you've got a problem on your hands.” Terry Smith

"If a company must acquire something, I'd prefer it to be a related business, but acquisitions in general make me nervous. There's a strong tendency for companies that are flush with cash and feeling powerful to overpay for acquisitions, expect too much from them, and then mismanage them. I'd rather see a vigorous buyback of shares, which is the purest synergy of all." Peter Lynch

"Synergy - a term widely used in business to explain an acquisition that otherwise makes no sense." Warren Buffett

“Cost synergies are much more reliable than revenue synergies. About one-third of the executives surveyed [McKinsey Survey] said that their company achieved all or more of the anticipated cost synergies, while one quarter of the companies overestimated their cost synergy by 25% or more. But roughly 70% of mergers fail to deliver the anticipated revenue synergy. The most common challenge companies cite for synergy realisation include delays in implementing planned actions, underestimation of costs and complexities, and flat-out overestimation of synergies.” Michael Mauboussin

“The reason we avoid the word ‘synergy’ is because people generally claim more synergistic benefits than will come. Yes, it exists, but there are so many false promises. Berkshire is full of synergies - we don't avoid synergies, just claims of synergies.”
Charlie Munger

“You always have these things that the investment banker will tell you will produce synergy and all that. Most times that doesn’t work.” Warren Buffett

"In our judgment, onetime acquisitions that enhance earnings by cutting expenses do not represent sustainable growth and are rarely as productive as either management or investors expect." Lee Ainslie

"Buying another company based on the perception of opportunities for cross-selling and other intangible benefits generally represents a much higher level of risk than I believe is justified. Therefore, I concentrate on eliminating redundancies, which measurably reduces the capital required to run the business. Redundancies are much more predictable and transparent than theoretical opportunities to add value." Sam Zell

“I don’t think that consolidation usually solves many problems. I mean, if you have two lousy businesses and you put them together, you’ve got a big, lousy business, usually. And I am not a big fan of consolidation where the theory is that you’re going to — you really have two very mediocre businesses and you’re going to wring the costs out of one. And it doesn’t — it just doesn’t work that way in my experience.” Warren Buffett

“When you mix raisins with turds, you still have turds.” Charlie Munger

“The success rate of ‘transformational’ deals, large leaps into different industries, tend to be very low.” Michael Mauboussin

“A more subtle red flag is when a company is either acquiring other companies or investing in capex projects that are different to what they have done in the past. They pose risks that need to be considered. The new acquisitions or projects may be different in size and scope, or may be in new areas but, either way, they pose a risk that needs to be considered carefully. This is especially true if the new large project is causing the company to incur more debt.” Ken Stein

"A serious problem occurs when the management of a great company gets side-tracked and neglects its wonderful base business while purchasing other businesses that are so-so or worse (Would you believe that a few decades back they were growing shrimp at Coke and exploring for oil at Gillette). Loss of focus is what worries Charlie and me when we contemplate investing in businesses that in general look outstanding." Warren Buffett

"Companies that would otherwise have been a magnificent opportunity for stockholders have a number of times been made quite unattractive by a management with one good line of great intrinsic strength and potential, acquiring several other weak or run-of-the-mill types of business. Usually this is done with the explanation to stockholders that by diversifying the company's activities, the stockholder's position is being strengthened! When this happens, the previous steady upward trend of the price of the company's shares sometimes comes to an abrupt and perhaps permanent halt." Phil Fisher 1960

"It is assumed by many business school graduates, and by almost all consultants, that a corporation can easily improve its outcome by purchasing unrelated or tenuously related businesses... Our experience, both actual and vicarious, makes us less optimistic about easy solutions through business acquisition. We think undue optimism arises because successful records draw to much attention... Far too little attention is given to the terrible effects on shareholders (or other owners) of the worst examples of corporate acquisitions." Charlie Munger

"Paying a takeover premium does not make sense for any acquirer unless a) its stock is overvalued relative to the acquiree's or b) the two enterprises will earn more combined than they would separately. Predictably, acquirers normally hew to the second argument because very few are willing to acknowledge that their stock is overvalued. However, voracious buyers - the ones that issue shares as fast as they can print them - are tacitly conceding that point. (Often, also, they are running Wall Street's version of a chain-letter scheme.)" Warren Buffett

"There is nothing like success to blind one of the possibility of failure. What tends to inflate the price that CEO's pay for acquisitions? Studies found evidence of infection through three sources of hubris: 1) overconfidence after recent success, 2) a sense of self-importance; the belief a high salary compared to other senior ranking executives imply skill, and 3) the CEO’s belief in their own press coverage.” Peter Bevelin

“Managers tend to be reluctant to look at the results of the capital projects or the acquisitions that they proposed with great detail only a year or two earlier to a board. And they don’t want to actually stick the figures up there as to how the reality worked out relative to the projections. That’s human nature.” Warren Buffett

"There may be quite a high degree of investment risk in a company that as a matter of basic investment policy is constantly and aggressively trying to grow by acquisition.. it is my own belief that this investment risk is significantly still further increased when one of two conditions exist in a company's organisational make-up. One is when the top executive officer regularly spends a sizeable amount of his time on mergers and acquisitions. The other is when a company assigns one of its top officer group to making such matters one of his principal duties. In either event powerful figures within a company usually soon acquire a sort of psychological vested interest in completing enough mergers or acquisitions to justify the time they are spending." Phil Fisher 1960

“My observation is that they have the best chance of creating value where the business purchased as nearly as possible meets the following criteria: It is paid for by internally generated cash; It is a replica of one already owned by the purchaser; It is a bolt-on or quasi-bolt-on; And, finally, it is likely to improve the quality as well as the quantity of earnings. By definition, therefore, the reverse applies and the acquisition least likely to succeed is the one which is only viable if paid for in shares, is a diversification, is large in relation to the company that is buying it and is identifiable as a turn-round or relatively poorly managed business.” David Barber, Founder Halma

"In the past, I've observed that many acquisition-hungry managers were apparently mesmerized by their childhood reading of the story about the frog-kissing princess. Remembering her success, they pay dearly for the right to kiss corporate toads, expecting wondrous transfigurations. Initially, disappointing results only deepen their desire to round up new toads. (‘Fanaticism,’ said Santyana, ‘consists of redoubling your effort when you've forgotten your aim.’) Ultimately, even the most optimistic manager must face reality. Standing knee-deep in unresponsive toads, he then announces an enormous ‘restructuring’ charge. In this corporate equivalent of a Head Start program, the CEO receives the education but the stockholders pay the tuition." Warren Buffett

"[Berkshire] never had the equivalent of a ‘department of acquisitions’ under pressure to buy. And it never relied on advice from ‘helpers’ sure to be prejudiced in favor of transactions. And Buffett held self-delusion at bay as he underclaimed expertise while he knew better than most corporate executives what worked and what didn’t in business, aided by his long experience as a passive investor." Charlie Munger

“Too often CEOs seem blind to an elementary reality: The intrinsic value of the shares you give in an acquisition must not be greater than the intrinsic value of the business you receive. I’ve yet to see an investment banker quantify this all-important math when he is presenting a stock-for-stock deal to the board of a potential acquirer. Instead, the banker’s focus will be on describing “customary” premiums-to-market-price that are currently being paid for acquisitions – an absolutely asinine way to evaluate the attractiveness of an acquisition – or whether the deal will increase the acquirer’s earnings-per-share (which in itself should be far from determinative). In striving to achieve the desired per-share number, a panting CEO and his “helpers” will often conjure up fanciful “synergies.” (As a director of 19 companies over the years, I’ve never heard “dis-synergies” mentioned, though I’ve witnessed plenty of these once deals have closed.) Post mortems of acquisitions, in which reality is honestly compared to the original projections, are rare in American boardrooms. They should instead be standard practice.” Warren Buffett

"My focus is always on the downside. Overly optimistic assumptions lead to the graveyard of corporate acquisitions." Sam Zell

"In most acquisitions, it's better to be the target than the acquirer. The acquirer pays for the fact that he gets to haul back to his cave the carcass of the conquered animal." Warren Buffett

“If a management participates in a buyout group, you know they have hidden jewels.” Mario Gabelli

"In the highest reaches of business, it is not all uncommon to find leaders who display fellowship akin to that of teenagers. If one oil company foolishly buys a mine, other oil companies often quickly join in buying mines." Charlie Munger

“Every deal does tend to brew another deal, particularly with people in the industry. If Coca-Cola buys something, Pepsi thinks about something in the same arena. I've been in enough board meetings to hear that. Every CEO has, you know, has a little bit of that ‘all the other kids are doing it.’” Warren Buffett

“I have yet to see a CEO who craves an acquisition bring in an informed and articulate critic to argue against it. And yes, include me among the guilty. Overall, the deck is stacked in favor of the deal that’s coveted by the CEO and his/her obliging staff. It would be an interesting exercise for a company to hire two “expert” acquisition advisors, one pro and one con, to deliver his or her views on a proposed deal to the board — with the winning advisor to receive, say, ten times a token sum paid to the loser.” Warren Buffett

“This, in brief, then, is the excellent companies’ story. They do acquire; but they acquire and diversify in an experimental fashion. They buy a small company or start a new business. They do it in manageable steps .. and clearly contain the risks. And are willing to get out if it doesn’t work.” Tom Peters, ‘In Search of Excellence’

“The good-to-great companies used acquisitions as an accelerator of flywheel momentum, not a creator of it. In contrast, the comparison companies frequently tried to jump right to breakthrough via an acquisition or merger. It never worked. Often with their core business under siege, the comparison companies would dive into a big acquisition as a way to increase growth, diversify away their troubles, or make a CEO look good. Yet they never addressed the fundamental question: "What can we do better than any other company in the world, that fits our economic denominator and that we have passion for?" They never learned the simple truth that, while you can buy your way to growth, you absolutely cannot buy your way to greatness. Two big mediocrities joined together never make one great company.” Jim Collins, ‘Good to Great’

“Think of M&A as having four quadrants defined by size and risk. Big, low-risk deals are the ones everyone wants, but they don’t exist. Small, low-risk deals do exist, but you can’t make much money from them because of their size. Small, hairy deals are the worst quadrant, because the reward is limited and the odds are stacked against you, so why bother? The bingo quadrant is the big, hairy deals. If you can find a big, hairy deal with solvable problems, that’s where the real money is.” Brad Jacobs

“You learn a great deal about a person when you purchase a business from him and he then stays on to run it as an employee rather than as an owner. Before the purchase the seller knows the business intimately, whereas you start from scratch. The seller has dozens of opportunities to mislead the buyer - through omissions, ambiguities, and misdirection. After the check has changed hands, subtle (and not so subtle) changes of attitude can occur and implicit understandings can evaporate. As in the courtship-marriage sequence, disappointments are not infrequent.” Warren Buffett

Further Reading:
‘Phil Fisher on Mergers & Acquisitions’, Investment Masters Class. 2016.