The Fruits of Civilization (47) Mergers & Acquisitions

Mergers & Acquisitions

A company may merge or acquire another to ostensibly obtain a competitive advantage or better serve its customer base. Disney’s acquisitions of Pixar, the animated movie maker, and Lucasfilm, creator of Star Wars, enlarged the corral of characters for Disney theme parks and merchandise. The mergers also enlivened Disney overall. Disney’s acquisition story with a happy ending is all too rare.

It is well known that acquirers tend to overpay in corporate acquisitions. Classical auction theory, which assumes that bidders set their bids without regard to the identity of other bidders, does not apply to the market for corporate control. ~ American corporate law professor Robert Miller

3PAR was a cloud computing company founded in 1999, back when cloud computing was in its salad days. The company had some leading-edge technology when it began, but 3PAR had not been profitable when both Dell and HP set their sights on acquiring it in mid-2010. Dell and HP both felt anemic in cloud computing, though each already had its own division; and the rivals wanted to keep 3PAR out of the other’s hands. A bidding war ensued, which HP won by grossly overpaying: over 3 times 3PAR’s share price. The 3PAR acquisition did HP no good: it only drained HP’s financial reserves at a time of strategic floundering that led to the company’s decline.

A merger between large corporations which had been competing typically births a bloated behemoth with a bad rash of culture clash.

In 1998, Daimler Benz merged with US automaker Chrysler to create Daimler Chrysler, at a cost of $37 billion. The logic was obvious: create a trans-Atlantic powerhouse. The merger sputtered. In 2007, Daimler dumped Chrysler for $7 billion: 19% of what it had paid only 8 years earlier.

Due diligence? Daimler Benz never did due diligence before it bought Chrysler, never looked into the future to see whether Chrysler could be competitive. ~ American economist George Peterson

Contrasting cultures and management styles dogged Daimler Chrysler during its brief marriage. Whereas Chrysler represented American adaptability and valued managerial empowerment, the Teutonic Daimler prized a more traditional respect for hierarchy and centralized decision-making.

Sometimes an acquisition just does not make sense, even though it seems to for the love-struck acquirer. In 1994, grocery-store legend Quaker Oats bought the bottled tea and fruity-drinks maker Snapple for $1.7 billion: $1 billion more than many analysts thought Snapple was worth. Fresh from their success with Gatorade, Quaker wanted to sport Snapple as their next success story.

Quaker set out to situate Snapple in every grocery store and chain restaurant, spearheaded by a new marketing campaign. The effort failed miserably.

Snapple had found its niche in gas stations and small, independent stores, backed by quirky advertising. Quaker Oats management failed to grasp Snapple’s identity. 27 months after turning Snapple sour, Quaker Oats sold it for a mere $300 million; making the acquisition a daily loss of $1.6 million for Quaker.