Idea in Brief
The Problem
Although M&As are a tempting strategy for fast growth—and psychologically gratifying for CEOs—most of them are extremely expensive mistakes.
Why It Happens
Companies tend to look at acquisitions as a way of obtaining value for themselves—access to a new market or capability, for example. But if you spot opportunity in a company, others will too, and the value will be lost in a bidding war.
The Solution
Look for ways to give value to the acquired company rather than take it—by being a smarter provider of capital, offering better managerial oversight, transferring a skill, or sharing a resource. These approaches have been behind the handful of deals that have succeeded.
The financial world set a record in 2015 for mergers and acquisitions. The value of such deals eclipsed the previous record, set in 2007, which had surpassed an earlier peak in 1999. This is perhaps not auspicious: It seems (pace the late Prince) that we are partying as if it were 1999—and 2007 to boot. The headiness of those years didn’t bode well for either 2000–2002 or 2008–2009.