We're talking about growth through acquisitions. And remember, mergers and acquisitions have a pretty dismal success rate. And that raises a couple of interesting questions that are important for us to grapple with so that we can attempt to avoid the pitfalls associated with growth through acquisition. And the risks here are huge. And they're especially huge for mid-market companies. I mean, often times, really large companies have enough managers and resources to sort of patch things up if an acquisition goes south. But for mid-market companies this can be a sort of fatal mistake to attempt an acquisition that doesn't work out. So these two questions are important to consider, and let's talk about the first one. Why is it that acquisitions so often fail? Well I think there's several reason why acquisitions might fail. First of all, it simply might just be the wrong target in the first place. And what do I mean by that? I mean that think of it like a bad marriage. It's a couple of partners, in this case business partners, that just don't go well together. Perhaps the business models are incompatible, or the rationale for the acquisition is sort of nonsensical. It just doesn't make that much sense when you really thing about it. And therefore the potential combination of these two businesses just isn't an obvious win for the business. So, an example of this might be the infamous merger between Time Warner and America online as back in the late 90s and it was sort of lauded as this sort of big high profile merger between an old media company and a new media company. AOL was kind of an, at that time kind of a relatively young internet firm and Time Warner had a history of books and magazines and that sort of thing. But when you looked a little bit closer, and this is what they found after they attempted to merge, it just turned out that the business models weren't that compatible. It wasn't obvious what the additional value was that they'd be able to create together. So when there's no obvious synergies, sometimes that's a sign that it's just the wrong target to begin with. That's one reason an acquisition might fail. What's another reason? Well, another difficulty might have to do with how hard it is to implement the merger itself. The post-merger integration, how challenging it is to integrate the two companies afterwards. Obviously it's sort of easy on paper but it can be very difficult in practice. So these challenges with post merger integration can sort of be the real problem with a lot of mergers and the reason that they don't succeed. So, for example, think about the big merger that I talked about a few moments ago with American Airlines and US Air, forming the largest airline in the world. So again, it looked fine on paper, and it's still sort of playing out so I'm not suggesting that it's necessarily a failure, but their running into some of these challenges. For example, the integration of the reservation system and the frequent flyer programs. All of these sort of nitty gritty operational aspects of the business models of these two firms putting that all together is difficult and of course, on top of that, merging the cultures of two organizations is challenging. So one of the reasons for acquisition failure can simply arise from difficulties in the post merger integration or the implementation of the acquisition. Finally, another source of problems for acquisitions is simply overpayment. So let's think of an analogy, let's say in your personal life, let's say you're a young married person and you're starting a family and it's time for you to get a new car because you need a slightly larger car, a minivan say because you've got kids or you've kids on the way. So, that might make a lot of sense, but would you pay $100,000 for, say a Honda minivan? Probably not. Maybe you need that mini van. Maybe it would really good in your new, young, growing family but it's not worth paying more than that van is actually worth. So this idea of paying too much for the target is something that plagues a lot of acquisitions. So let me elaborate on that for a minute. The point here is that it seems crazy. The idea of paying $100,000 for a Honda minivan seems sort of crazy, right? But believe it or not, this is sort of a common problem in acquisitions, the overpayment. And so firms often overpay for acquisition targets. And as I've pointed out, on average, acquisitions and mergers reduce the value, especially of the acquiring firm, while the share holders of the target might gain a little bit. But you add all that up, and often times value gets destroyed, right? So, what's interesting about this is that it can be a problem even when the merger conceptually makes sense. Even when there's a great potential for compatibility of capabilities or complementarity of products and that sort of conceptually the idea of putting these two companies together makes a lot of strategic sense, if we overpay, that can sort of torpedo the whole thing, right? So go back to the mini van analogy. So if you've got a young growing family maybe it makes a lot of sense for you to get a larger vehicle. But is it really worth paying $70,000 more than that vehicle is actually worth on the open market? Probably not. But often times this is what firms actually do. And we'll talk about why that happens in a moment. But this idea that we pay too much and we're too optimistic about the benefits of that merger can result in a disaster. So think about, for example, if we wanna stick with the car analogy, think about several years ago when Daimler-Benz bought Chrysler, and again, this was a high profile merger in the automobile industry. But in practice, they never really realized any strategic benefits from that merger. And what you sorta step back and think about it, some of this I think is foreseeable. It isn't obvious that the product lines are gonna be complimentary. They serve us very different demographic customer bases, right? And it isn't obvious that they're gonna realize any sort of scale economies or benefits in production. It's unlikely that Daimler Benz is gonna sort of adopt Chrysler's front-wheel drive technology and we aren't gonna somehow manufacture less e-class Mercedes automobiles because we're selling more Dodge Neons. So a lot of this just sort of they over paid for Chrysler didn't make sense. And then sort of you fast forward they bought Chrysler for $37 billion and then later sold it for much less than that at a loss. So, you have to be really careful about this over payment risk when you're engaging in a growth strategy that involves an acquisition.