The following are the astute observations of Carl Hagberg, pulled from an online acquisition Risk Management conversation about M & A, shareholder value, and strategic issues. My comments (that Carl refers to) follow in the More section.
Carl is Editor and Publisher at The Shareholder Service Optimizer
Greater New York City Area http://www.optimizeronline.com/
& he is Chairman & CEO at Carl T. Hagberg and Associates
As an investor, I am extremely concerned by the perfectly awful returns on investment – overwhelmingly terrible ones as the above-cited numbers point out – that have been booked year after year as a result of bad acquisitions by public companies.
This year, when public companies are sitting on record levels of cash – with the 500 largest U.S. non-finanacial companies holding some $994 billion in the 3rd Q. of 2009, according to the WSJ – I am more concerned than ever:
I am hardly the first person to point out that having large stashes of cash on hand – rather than strictly strategically-oriented brainstorms or breakthroughs – are among the major drivers of acquisitions. Historically, having too much cash on hand seems literally to burn a hole in the pockets of CEOs. And when one couples the undeniable thrill of being “flush” with the ego-gratifying idea that this is all due not to dumb luck, or perhaps to a rising tide that’s lifted all the boats in the fleet, but rather, to the CEO’s strategic brilliance…and then throws in the admittedly exciting idea of growing even bigger and richer through an acquisition or two…a disaster ensues for investors well more than half the time. The surprise to me is why we’re surprised here…and time after time after time.
Just as bad from a long-term investors’ point of view, the same top-500 companies who are now so flush with cash cut their dividends by $58 billion a year in 2008. And now, in 2010 they seem to be in a race to spend mega-billions (once again, now that stock prices are rising) on buying back their OWN shares – yet another area where the overwhelming majority of companies that practice THIS art have a history of destroying, rather than building shareholder value for long-term holders.
As a share owner who takes a long-term view, I’m all in favor of making “smart acquisitions”, of course. And right now, where many good companies are flush with cash, and many not-so-great companies, that could benefit big-time from having a savvier owner, are selling near their alltime lows, the opportunities to make great acquisitions ARE great. But as the earlier commenters noted, the historical record is a mighty poor one, and yes, the lack of a truly smart strategic rationale, couped with not-very-smart or savvy execution has been a bad deal for shareholders in the majority of instances. And as the numbers also show, acquisitions have proven to be waste of valuable management time and attention another 17% of the time.
What should we long-term investors be doing in this environment? First, I say we need to insist that WE get paid first when companies are flush with cash. I’d like to see fully HALF of such money get dividended out to us owners – where WE can have it in our hot little hands, to invest it or spend as WE chose to do. And if WE lose it, that’s OK: After all, WE are the OWNERS!
Second, I think we should be pushing back bigtime against big share buyback programs. Sure, the short-termers make out fine here, since public companies have a long history of buying only at the very top of the market…which is often hyped even more – short term that is – by the news of a big buyback program and its “artificial” and too often temporary increase in demand for the stock. Well managed companies ought to be able to find much smarter uses for our money than this…and should indeed be spending any “excess cash” they have on things like R&D, advertising and yes, on making savvy acquisitions that will throw of even MORE MONEY….for US.
And last, we should, of course, be holding company management – and the board members too – much more accountable than we do today when it comes to justifying potential acquisitions – and executing on them as promised.
Mike Tikkanen’s Comments to which Carl replied;
According to Interim CEO, 71% of their placed executives have completed less than three acquisitions when they are hired for that purpose. This partially explains why between 53% & 61% of transactions destroy value & only 17% create substantial returns. From planning to execution to integration, acquisitions are complex.
The finely tuned watch comparison is an appropriate analogy. Any misaligned piece causes the watch to run badly, and while there are many people capable of dismantling the watch, few can put it together.
Repeatedly, I see teams of smart people with pieces of the skill set required to undertake the process, only to observe disastrous consequences of an obvious mistake blowing a hole in the transaction (or worse yet, forcing a poorly chosen transaction to be completed).
Much of the candidate criteria determination, auditing, and integration is non linear. It’s surprising to see how much attention is paid to numbers, and how little to people, systems, relationships, and networks.
Mapping an acquisition is too much for this piece, but to state the wisdom of including a plan for non-financial audits and integration at the time of profiling and research would guarantee an understanding of process and a good chance that missing gaping misfits in people and systems would less likely ruin a deal.
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