Almost two-thirds of 333 acquisitions completed in the third quarter failed to add value to the acquiring company, a survey by Cass Business School for the global consultancy Willis Towers Watson found.
This is the eighth consecutive quarter in which more deals hurt than helped companies' values. Performance by acquiring companies underperformed the MSCI World Index by an average 6.4 percentage points, the second-worst result since the company started tracking performance of global M&A deals in 2008, according to the survey.
- Fewer deals are also being undertaken. This year is expected to be the fourth in a row in which acquisitions are down compared with the previous year. "Tough conditions and intensifying competition for an ever-shrinking pool of targets further ramp up the stakes," said Duncan Smithson, senior director of mergers and acquisitions at Willis Towers Watson.
Global macroeconomic uncertainty is a big part of why fewer transactions are being pursued, why they're taking longer, and it might even play a role in their poor success rate, David Hunt, senior director of global services and solutions at Willis Towers Watson, told CFO Dive.
"Brexit, trade, the slowdown in China — uncertainty is always the killer of these things," he said. "People aren't sure what's going to happen, so they're a bit more hesitant to do deals."
Nothing in the data links global uncertainty to the poor success rate of deals, but Hunt said there's anecdotal reason to consider whether the two are correlated.
"Some of it is skepticism," he said. "You're looking at a measure of the equity markets, so therefore it's a reflection of what shareholders are thinking."
Hunt said he thinks the uncertainty is leading companies to take more time on deals before finalizing them. Deals take 140 days to close, up from 119 last quarter, according to the survey.
"People aren't sure what's going to happen, so when they do decide to do the deals, they seem to be taking longer," he said.
Acquisitions have long been an inconsistent path for companies hoping to grow their value. Hunt said problems get built into the deal from the start if the executives aren't aligned on the strategic objective for the deal.
"The CEO might be thinking one thing, the CFO might be thinking something else, the business leader of the subgroup that's doing the integration might be thinking something else," he said.
It becomes a big problem when the CEO or another leader presses to move forward even as the due diligence process results in findings that suggest the deal should be abandoned. When you start "falling in love with the deal, you start accepting more things than you should," he said. "You start looking at the model and say, 'Ah, we can take that. Let's just do this.' Then they'll start adding synergies to it, whether they're cost synergies or revenue synergies, to make the numbers work."
Allocating insufficient money to integrate the right way is another problem. "The cost of integration is never zero, but some companies are trying to do it without having an integration budget, so they don't have to build integration costs into the model to make the numbers look better," he said.
The most promising acquisitions are those in which the company expands on its core competencies. The riskiest are those in which a company tries to cross into unfamiliar industries. "Shareholders tend to be happier with deals within core competencies as opposed to expanding beyond them," he said.