“Acquisitions are a high risk strategy”

Acquisition is a High Risky Strategy

2005

Introduction

For the past few years , unsuccessful stories of various acquisition failures have become a managerial theory and practice . Trying to answer the question of what went wrong with acquisitions , analysts draw their own conclusions : acquisition failure can be attributed to poor synergy bad timing , incompatible cultures , off-strategy decision-making , hubris and greed . However , one universal conclusion becomes obvious - acquisition represents a highly risky strategy for any company in any business situation

Between recognizing the potential value of acquisition and achieving a

br new and fully integrated enterprise is a dangerous middle ground where anything that can go wrong will . Early on the buying company needs to fully understand exactly what it 's getting and what it 's getting into As acquisitions become increasingly complex , the activities of due diligence become more important . The danger is not that companies fail to do due diligence , but that they fail to do it well , which means the company fails to estimate and forecast major risks , threats and difficulties associated with coming acquisition

Although the number acquisitions has declined over the past two years the deals that are being struck are far riskier than those of the 1990s The increasing risk can be traced to at least three converging trends (1 ) Companies in maturing industries are rebalancing their portfolios or selling off pieces of the business . Companies that acquire these pieces must "untangle " the target 's business processes from its parent company in many cases , the pieces being sold have entrenched processes and cultures that are difficult to integrate into the buyer 's organization (2 ) Cross-b transactions - increasingly common because of the global reach of today 's industries - are intrinsically riskier than those within a single country (3 ) Expectations have changed . In the 1990s , an acquisition was expected to deliver cost reductions . Now , the latter is often a core growth strategy as well . Achieving projected growth targets is far less certain than achieving projected cost savings - and more difficult to measure

Acquisitions and Risks : Theoretical Assumptions

In the literature , several motives for takeovers have been identified One is the desire for synergy . That is , similarities or complementarities between the acquiring and target firms are expected to result in the combined value of the enterprises exceeding their worth as separate firms (Collis and Montgomery , 1998 . A second motive involves the expectation that acquirers can extract value because target companies have been managed inefficiently (Varaiya , 1987 . A third motive is attributed to managerial hubris - the notion that senior executives , in overestimating their own abilities , acquire companies they believe could be managed more profitably under their control Agency theory motive is the anticipation that firm expansion will positively impact the compensation of top managers since there tends to be a direct relation between firm size and executive pay

Contemporary specialists contend that managerial ownership incentives may be expected to have divergent impacts on corporate strategy and firm value . This premise has been recognized in previous studies . For instance , Stulz (1988 ) has...