Long time investors know to place more emphasis on risk than on reward. However,  Corporate management usually does the opposite, and this is why most large acquisitions fail.

Usually people already assume from the start that an acquisition will fail — or at least will turn out not nearly as profitable as the picture management paints.

For starters, a buyer typically pays too much. An old Wall Street adage comes to mind: “Price is what you pay; value is what you get.” It all starts with a control premium. When we purchase shares of a stock, we pay a price that is within pennies of the latest trade. When a company is acquired, though, the purchase price is negotiated during long dinners at fine restaurants and comes with a control premium that is higher than the latest stock quotation.

How much higher? Acquisitions have the elements of a zero-sum game. Both buyer and seller need to feel that they are getting a good deal. The seller has to convince the company’ s board and its shareholders that the sale price is high (unfairly good). The buyer in turn needs to convince his constituents that they are getting a bargain. Both are talking about the same asset.

This is where a magic word — which must have been invented by Wall Street banks’ research labs — comes into play: “synergy.” The only way this acquisitions dance can work is if the buyer convinces his constituents that combining the two companies will create additional revenues otherwise not available, and/or it will eliminate redundant costs. Thus, the sum of synergies will turn the purchase price into a bargain.

In one example, look at General Electric Co., has been a subpar investment over the last two decades, you’ll find that it’s because of poor capital allocation. The company lost a lot of value in making destructive acquisitions — buying businesses at high prices, relying on false or unfulfilled synergies, and selling (divesting) at reasonable (or low) prices.

There are also a lot of “dis-synergies” (a term you’ll never see in an acquisition press release). The two corporate cultures may simply be incompatible. One company may have a strong founder-led culture, while in the other company decisions are made by consensus. Cultural incompatibilities only get worse when the buyer and seller are not engaged in the same business.

Acquisitions can also lead to an employee morale problem. The day before the acquisition, people at the acquired company came to work as usual. They were not particularly worried about the future. After the acquisition announcement, though, their job security is perceived as being at risk, and they are now on LinkedIn updating their profiles and networking. Now they worry about the sustainability of their paychecks (and finding new jobs) a lot more than how they can help this great, new, more profitable organization that may be about to let them go.

Finally, integrating businesses is difficult. Aside from the culture problems, companies must realign global supply chains, move or combine headquarters, and merge software systems. In large companies, this task is like merging two complex nervous systems.

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