Tuesday, September 10, 2013

Why do so many buyouts fail?

If you want to know why so many corporate buyouts end up loosing money, watch the TV show Storage Wars.

In this TV show the participants are buying abandon storage lockers on the chance that there is something of value inside. As part of the show, some of the bidders end up bidding against someone else and not against their own estimate of the value of the locker’s contents!

Now it may be that the bidding rivalries are just TV show dramatics, but it’s instructive just the same. Far too many companies end up paying a purchase price so close to what they need to make to a return on their investment that there is no cash flow left to support normal operations of the company they bought much less to grow that business.

A big part of the overpayment problem, in my not so humble opinion, is the drive to show a profit much too quickly. This causes the acquiring company to be so focused on showing a profit that they starve the company they just bought for the funds it needs to stay healthy enough just to exist.

The other major component in causing the acquisition to fail is that different businesses have different methods. You would run a company that makes washing machines very differently than you would manager a movie production company. But, and it’s a huge but, in the misguided attempt to merge the two business there is an unfortunate tendency to try and make the new acquisition conform to the management and business practices of the buying company.

Whether or not those practices actually fit both companies!

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