Pros and Cons of Acquisitions

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Business Growth Strategy

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University of Virginia

Business Growth Strategy

336 ratings

Course 3 of 5 in the Specialization Business Strategy

Get the tools you need to analyze, evaluate and recommend specific actions organizations can take to grow their value and avoid common growth pitfalls. Learn to determine how best to build value, whether by scaling existing markets, entering established markets or creating new markets through innovation and acquisitions. Apply these concepts in case studies of industry leaders JetBlue, Starbucks, Intel Corporate Venturing and Tata Motors.

From the lesson

Growth through Acquisition

Mergers and acquisitions (M&A) are common--but rarely successful--ways firms attempt to grow their business. In this module, we'll show you the pros and cons of M&A, suggest valid alternatives, and outline effective M&A strategies. Using the Acquisitions Analysis tool, you'll be able to assess the impact of a potential M&A and avoid common pitfalls of this type of growth. Through an analysis of the Tata Motors case, you'll have a chance to apply this tool to determine an effective growth strategy.

Growing through Acquisition6:38

Pros and Cons of Acquisitions5:54

Pitfalls of Growth Through Acquisition7:12

Why Firms Overpay for Acquisitions5:41

Alternatives to Acquisition7:05

Identifying Successful Acquisition Opportunities3:05

Acquisition Analysis5:39

Strategic Benefit: Value of the Target2:13

Avoiding Overpaying4:26

Acquisition Analysis: Opportunity Costs6:33

Module Lessons4:54

Meet the Instructors

Michael Lenox
Senior Associate Dean and Chief Strategy Officer
Darden School of Business
Jared Harris
Samuel L. Slover Research Chair in Business Administration
Darden School of Business

We're talking about growth through acquisition.

Now conceptually, why would an organization want to pursue an acquisition

as a potential growth strategy?

Well theoretically, there are some pros and cons.

What are these potential advantages and disadvantages?

Well first of all, one potential advantage of a acquisition as a growth strategy is

it might help the organization overcome some otherwise difficult or

insurmountable barriers to entry.

In other words, if they wanna enter a particular geographic market or

product market, or

the entry barriers are quite high because of the structure of that industry segment.

Maybe an acquisition is the way to overcome those high entry barriers and

bring them down.

We can just acquire a firm that's already operating in that space.

It might also facilitate a faster market entry into a new market segment or

industry, right?

If we can just buy another firm that's already up and running in that space,

all of a sudden, boom, we're operating in that industry, right?

An acquisition can also be a way of attempting to acquire intangible assets.

Maybe there's a particular company that has a great brand.

A very valuable and

recognizable brand name, and high degree of customer loyalty for example.

And so the attempt to sort of appropriate some of that value, that intangible value

associated with that firm's operations, the product, or service, the brand.

An acquisition might be a way to attempt to just sort of buy that asset.

Conducting an acquisition has the potential advantage also

of avoiding some of the uncertainty and the risk and

certainly the long lead times of instead trying to internally develop.

Those particular products or services or capabilities, right?

So those are the potential advantages of pursuing an acquistion approach to growth.

What are the disadvantages?

I think some disadvantages involve things such as the synergy, or that potential

to create even more value together with the acquiring and the acquired firm.

Maybe that potential synergy just doesn't really exist, right?

We think it's there and it turns out it's not there,

it can be awfully difficult to integrate the two companies.

Post-merger integration is notoriously difficult to pull off.

And so while an acquisition looks good potentially on paper,

in practice it can be a difficult thing to pull off and to pull off well.

Often times firms that are persuing a growth by acquisition strategy become

over leveraged.

They've borrowed to much,

they've taken on to much debt in order to make those acquisitions.

And if the payback period on those

strategic moves is too long that could put them in financial difficulties, right?

And finally, one of the chief risks with

an acquisition strategy to growth is simply overpaying for the acquired firm.

It's very common for that to happen.

So, as we think about these pros and

cons that might give you the sense that, that it's kind of a 50/50 proposition.

There's some advantages and there's some disadvantages.

But actually, empirically, that's not really true.

It turns out that most acquisitions fail.

Most acquisitions destroy value, especially for the acquiring firm.

And so, given that, there's a lot of reasons to sort of

be cautious about pursuing an acquisition strategy for growth.

Nevertheless, organizations spend a lot of money up to $2 trillion a year,

over $2 trillion a year on acquisition.

So, firms are making lots of attempts to make these acquisitions, but

it's extraordinarily difficult to pull that off.

Obviously, all of these acquisitions look good on paper.

In other words, all the analysts and all the people looking at the potential deal

involved, have a spreadsheet model tells them this is a good thing to do.

But in practice it's very difficult and it's difficult to build a model that can

incorporate all of the potential difficulties and

risks associated with making an acquisition.

So how bad are the odds?

I've told you that most mergers have difficulties, well how bad is it?

Depending on what source you look at and

what kind of analysis has been done, it looks pretty dismal.

It's at least over half.

Forbes suggests that acquisitions are kind of a coin toss,

it's sort of a 50/50 proposition.

You toss a coin, heads tails, that's about what your odds are.

Now other sources suggest that even more than 50% of acquisitions fail,

50 to 85% says CBS News, far North of 50% says CNN.

Harvard Business Review suggests that it's between 70 and

90% of acquisitions that end up failing.

Up to 90%, Business Review Europe.

So you can see that the odds are not good here.

The running joke is that if you want to give good consulting advice when someone

comes to you and says hey, I'm thinking about making this acquisition.

You should stop them right there and say, don't do it.

So, okay, that's a joke.

Some acquisitions pay off and they're successful.

But the odds are definitely not in your favor.

It's very difficult to pull off a successful acquisition growth strategy.

So understanding that I think raises a couple of really interesting questions for

us to consider as we think more about acquisitions as a growth strategy.

First of all why do these acquisitions so often fail?

Why do most of them fail?

I think that's a really important question to understand.

And second, given the high likelihood of failure,

why do firms continue to attempt such acquisitions?

So these are the questions to think about as we consider growth through

acquisitions.

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