A couple of weeks ago, I wrote about the conditions you might look for as a lead indicator for potentially successful M&A processes (find the article here).
This week, the case for the serial acquirer was once again knocked back as the two of the leading proponents for an inorganic growth strategy failed. In SunEdison’s case, filing for bankruptcy whilst for Valeant, the wholesale change of the board and I would suspect, the breakup of the business as the new leadership starts to grapple with the significant debt overhang.
As an aside, the architects of these strategies have both lost their jobs and perhaps damaged their reputations but beyond that, are financially unscathed.
An interesting alternative story comes in the commentary on M&A Berkshire Hathaway style by Larry Cunningham in the excellent podcast series, the Innovation Eco-System (you can find the link here) where he talks to value creation in M&A as a longer term strategy, not tied to the quarterly reporting malaise which appears to be the driver behind many short term disastrous decisions.
No doubt books are already being written about the rise and fall of Valeant as those who know the company leverage their knowledge to create some learnings. I would like to add my two cents worth to the forthcoming debate:
- Excessive debt leverage to finance acquisitions drives the type of behaviour which is perhaps at the heart of the most significant challenges for successful M&A…short term, integration lite, target identification driven (where finding the next acquisition becomes the primary strategic discussion rather than creating value from the acquisition by means of cost efficiency processes or genuine revenue synergies), externally focused.
- Acquisition accounting practices become a source of performance improvement and therefore a focus rather the potential for synergies (and a due diligence process which validates these). Tax inversion is another example where the strategic rationale for a transaction is subverted in favour of financial engineering.
- There is no room for the ‘naysayer’. The direction of the business is completely intertwined with the ambition of the leadership, such that there is no longer any room for discussion, disagreement or constructive criticism. The mantra ‘my way or the highway’ infiltrates the culture of the organisation such that those with an independent mind leave, to be replaced by those whom this is not a priority.
- Strategy is completely divorced from operations…leading to a two speed organisation. Inevitably the pace of acquisition quickens as market opportunity and pressure mounts, resulting in less and less consultation / engagement with the operations of the organisation…and a governance model that no longer functions effectively. In Valeant’s case, the issue of pricing and the management of the distribution channel is perhaps a reflection of this breakdown in governance.
Inevitably, this story will serve as another in the litany of Icarus type failures with the root cause firmly attributed to reckless M&A. Some balance may however be sensible…let’s not just blame the machinery but perhaps look more closely at the operator?