The urge to merge

Spring is in the air, and as Tennyson almost said, in the spring, a young businessmanÔÇÖs fancy lightly turns to thoughts of acquisition. Martin Ashcroft ponders the poetry of this strategy for growth. ÔÇÿBirds do it, bees do it, even educated fleas do itÔÇÖ; letÔÇÖs do it, letÔÇÖs merge and acquire. With apologies to Cole Porter, merger and acquisition are in season, and seem almost as common as falling in love. The global business environment dictates that companies have to grow to consolidate their footprint in the market place. If they cannot do this organically, they have to look to acquisition to broaden their perspective, through new products and technologies, new markets, reduced costs through economies of scale, or simply eliminating competition.While executives may dream about a merger made in heaven, however, analysts report that up to 75 percent of acquisitions fail, which is a worse failure rate than marriage; but, as with love, the statistics seem not to put anybody off. If you will indulge me one more quotation, the British 19th century politician Benjamin Disraeli said there are three kinds of lies; ÔÇ£lies, damned lies, and statistics.ÔÇØ So do the statistics lie? If the majority of mergers and acquisitions are alleged to fail, there must be more than statistics behind the drive to keep on doing it. It may well be that analysts who judge the success of an acquisition look no further than to compare the revenues of the merged company with the cost of its union. That may produce an understandable black and white league table, but it could also be a rather simplistic equation. Is there more to the success of a merger than numbers? And what time scale are they looking at? Huge amounts of money are spent on integrating disparate IT systems after a merger, and where multinationals are concerned, the process can take a long time. How long should we give them, before we pass judgement? ÔÇ£A lot of it is the definition of what failed means,ÔÇØ offers Mark Hall, chief information officer of CXO Media and founding general manager of the CIO Executive Council. ÔÇ£If youÔÇÖre a large company making an acquisition youÔÇÖre doing it for a business reason. Often, the companies donÔÇÖt fully recognize the value of an acquisition because theyÔÇÖre off and on to the next one before theyÔÇÖve realized the full vision of why they acquired the company. Part of the reason for a perception of failure is because it may take three to five years to fully actualize the merger of an organization. It often falls to the CIO to fully integrate the organization in such a way that the company can fully recognize the value of the acquisition.ÔÇØ Companies in mature industries who want faster growth than they can sustain organically are on the lookout for acquisitions to accelerate expansion. In sectors where technology moves quickly, it makes sense to acquire specialist technology from elsewhere, rather than develop it yourself. That was the case when Chicago-based circuit protection manufacturer Littelfuse acquired Teccor, of Dallas, Texas, in 2003. A mid-sized company cannot develop everything itself, explained Littelfuse chairman, president and chief executive Gordon Hunter. TeccorÔÇÖs silicon materials were a long way from LittelfuseÔÇÖs core competence in metallurgy, so the purpose of the acquisition was primarily to obtain the technology. What Littelfuse also gained, however, was a group of people knowledgeable about the technology and its applications. ÔÇ£Even in the due diligence period before we closed the acquisition,ÔÇØ Hunter remembers, ÔÇ£we had a pretty good feeling about the key people. Almost all of the people we wanted to keep are still with us.ÔÇØ As these people move around the organization over time, itÔÇÖs more difficult to quantify the benefit of the original acquisition, but thereÔÇÖs no doubt as to their value to the acquiring company.Another example is the acquisition of Semitron Industries in Swindon in the UK a few years ago. The product made there proved too expensive to continue to produce in the UK, so the decision was subsequently made to transfer production to China. A failed acquisition, you might think. ÔÇ£But we got some people with our Swindon operation, some critical talent, who have transferred and played crucial roles in our worldwide silicon strategy, including the company in Texas,ÔÇØ said Hunter. ÔÇ£So this team of guys that we got from the acquisition are a huge success, even if the product line hasnÔÇÖt driven a lot of profit for us. You could look back at that acquisition and say that for what we intended, for that product line to get really profitable and grow the revenues, it hasnÔÇÖt really worked out, but the talent we got and how theyÔÇÖre leveraged across the rest of the business is phenomenal.ÔÇØ Assets are another benefit that can be difficult to identify in the short term bottom line. One Littelfuse acquisition that did not go according to plan was that of a company in Korea, which Littlefuse purchased to strengthen its presence in Asia. The acquisition itself was challenging, says Hunter, and did not achieve its purpose of establishing market position in Korea, but the acquired companyÔÇÖs plant in the Philippines proved to be very productive, and after further investment, gave Littelfuse a manufacturing facility in Asia that it would never have been able to create from a Greenfield site.For Littelfuse, acquisition is entirely about strategy, stretching the boundaries of technology and market position. For others, it can be a matter of pure survival. Tony Makuch, chief operating officer of FNX Mining, told me recently about the ÔÇ£nickel warsÔÇØ of 2006, which resulted in the acquisition of Falconbridge by Swiss-owned Xstrata, and INCO being purchased by the Brazilian Companhia Vale do Rio Doce (CVRD), leaving FNX Mining as the only Canadian owned mining company in the Sudbury Basin. FNX managed somehow to keep its head below the parapet during the nickel wars, and is now itself acquiring properties from other companies in the Sudbury basin. ItÔÇÖs a question of whether you want to be a diner, or dinner. ÔÇ£This is a time for mergers and acquisitions,ÔÇØ said Makuch. ÔÇ£You either become dinner, if somebody comes and eats you up, or you become a diner and you eat somebody else. Eat or be eaten works in mining just like it works anywhere else.ÔÇØ A giant of business dining is GE, a multi-business company renowned for double digit growth that makes a hundred or so acquisitions every year. Established already in markets as diverse as light bulbs, aircraft engines, financial services, gas-fired power stations and high tech medical scanning equipment, GE is always on the look out for new technologies that offer the opportunity to outperform the market. GE has expanded in recent years into security equipment, water treatment and wind power. In the security arena, the star purchase was InVision Technologies in December 2004, the company that developed the first computed tomography (CT) technology for airport baggage inspection.These are not small deals either. In January this year GE announced an agreement to purchase UK-based Smiths Aerospace, which supplies integrated systems for aircraft manufacturers and components for engines, for $4.8 billion in cash. The acquisition will broaden GEÔÇÖs offerings for aviation customers by adding Smiths innovative flight management systems, electrical power management, mechanical actuation systems and airborne platform computing systems to GE AviationÔÇÖs commercial and military aircraft engines and related services. Who would bet on that being a failure? GE chairman and CEO Jeff Immelt is certainly confident about it. ÔÇ£This acquisition is consistent with our strategy to invest in high-technology infrastructure businesses that deliver strong growth, earnings expansion and higher margins,ÔÇØ he said at the announcement. ÔÇ£GE Aviation is growing about 10 percent a year and this acquisition gives us a technology growth platform that will be accretive to our net income and will deliver immediate and future value for our investors.ÔÇØ The biggest and most complex acquisition in the consumer packaged goods industry, Procter & GambleÔÇÖs purchase of Gillette, is widely expected to succeed. All the ingredients are there. Complementary products, similar corporate cultures, and the retention of key Gillette personnel add up to that magical word, synergy.GEÔÇÖs combination of vast numbers of acquisitions with superior growth begs the question of whether the alleged high failure rate is a myth rather than a reality. For there to be any credence in it at all, GE would have to be an exception to the trend, leaving little room for success anywhere else.