The Keys to Successful Acquisition Programmes

Long Range Planning 42 (2009) 137e163 http://www.elsevier.com/locate/lrp

The Keys to SuccessfulAcquisition Programmes

Sayan Chatterjee

Acquisitions are an important strategic tool for management e one that seems to fail moreoften than not. There is some anecdotal evidence that serial acquirers seem to havea better chance of success than ad hoc and one-off acquisitions. In this paper we suggestthat not all serial acquisitions are equally likely to succeed. Serial acquisitions that are partof an acquisition programme developed around sound business logic are most likely tosucceed.� 2008 Elsevier Ltd. All rights reserved.

Introduction

A programme is a cluster of tightly coupled projects, in which significant interdependencies existbetween the projects, often including the need to share scarce human, equipment, and otherresources.

e Executing your Strategy.

If history is any guide, more than half of all acquisitions will result in failure.1 There are, however,acquisitions that have been successful, and more impressively, acquiring firms that have a strongrecord over multiple acquisitions (broadly characterised as ‘‘serial acquirers’’ by practitioners).In 2008, the practitioner community generally accepts that serial acquirers do better than the oc-casional acquirer.2 However, many prominent serial acquirers such as Microsoft can be character-ised as ineffective at best, while some such as Lucent and Nortel have been total failures. Ourresearch is an attempt to peer into the process that allows some but not all serial acquirers to suc-ceed. What we began to appreciate after our extended interaction with many serial acquirers is thatmultiple acquisitions lead to success only when the acquisitions are part of an acquisition pro-gramme. This paper is our attempt to identify the key processes that lead to success in an acqui-sition programme.

Literature reviewResearch on acquisition programmes is sparse and most hails from the early 1980s and primarilyfrom the field of finance.3 This stream of research focused on the conglomerate acquisitions ofthe 1960s and the 1970s e the only well-publicised acquisition programmes.4 While this researchdemonstrated that acquisition programmes were positively received by the capital markets, it didnot investigate the success factors behind either the programmes or individual acquisitions.

0024-6301/$ - see front matter � 2008 Elsevier Ltd. All rights reserved.

doi:10.1016/j.lrp.2008.12.001

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Further, the acquisition programmes that we have witnessed since the 1980s are increasingly beingdriven by logic that has expanded well beyond the conglomerate model.

A second stream of research originating in strategic management did focus on success factors forindividual acquisitions.5 One of these factors was experience accumulated over multiple acquisi-tions but the factor that most research focused on was similarity or relatedness of the merging firms(as measured by SIC codes).6 Yet after 20 years, this research has remained inconclusive, possiblybecause it is founded on a logic that may be erroneous.7 These inconclusive findings led recent re-searchers to resurrect experience as a key variable but with a twist.8 These researchers posited thatnot all experience was equally valuable but similar experience was.9 While this was clearly a step inthe right direction, this research also measured similarity using SIC codes. This is the same (and inour view erroneous) logic that drove the inconclusive research stream investigating relatedness asa success factor in mergers and acquisitions. Finally, a recent paper has actually resurrected acqui-sition programme as a success driver.10 The authors posit that programmes that are narrow in scopeare more likely to succeed. The authors measure narrowness by the divergence of SIC codes amongthe acquisitions within a programme. In our opinion, this is nothing but a reincarnation of the re-latedness exercise. We realise the attraction of using SIC codes because of data availability. How-ever, we believe SIC codes can only measure market-based similarities (and imperfectly at best).

A recent study points out that if experience is to be a good predictor of acquisition success, thenit cannot be captured by external (market e SIC codes e based) similarities.11 This study concludesthat these similarities are rooted in internal processes that span all aspects of an acquisition e iden-tification, negotiation and integration. We believe that this is a very good start and in this paper weattempt to peer into the similarities that span these internal processes that lead to successful acqui-sitions. What we have discovered is that these similarities are best understood when acquisitions areviewed as part of a programme.12

Contents

What Is an Acquisition Programme?An acquisition programme is a group of acquisitions driven by a core business logic, often with sig-nificant interdependencies. The programme ends when the underlying logic is no longer viable (seeTable 1 for some examples). Further, a well articulated acquisition programme clarifies the businesslogic by which the acquisitions, individually and collectively, will create shareholder value. This clarityallows the acquiring firm to think through the processes needed to successfully carry out the pro-gramme. This clarity, therefore, reduces the probability of failure. It is important to note that insome cases this clarity arises serendipitously after the firm has made a few acquisitions and sees a com-mon pattern. Oracle’s recent acquisitions are a good example of this serendipity. In other cases such asCisco, the clarity preceded the first acquisition.

A well articulated acquisition programme clarifies the business logic by

which the acquisitions will create shareholder value

Some programmes are tightly clustered in time. Oracle has made 20 acquisitions between 2005and 2007 as part of a well-designed acquisition programme that will soon be studied as an exampleof successful acquisitions. On the other hand, firms such as Microsoft have made numerous acqui-sitions since the early 1990s that do not constitute an acquisition programme. While Oracle has alsomade sporadic acquisitions in the past, this recent spate is probably the only ‘‘programme’’ thatOracle has engaged in. On the other hand, firms such as the food giant Nestle have engaged in mul-tiple acquisition programmes. Nestle dominates the major food categories by virtue of its acquisi-tions of the best brands all over the world. Once the major brands were acquired in each food

138 The Keys to Successful Acquisition Programmes

Table 1. Examples of Acquisition Programmes

Acquiring

Firms

Programme Descriptions Core logic

Oracle One Programme: Broadly Business

Enterprise Applications. 20 acqui-

sitions between 2005 and 2007 e

likely ending soon

In 2004 Oracle began to increase its interest in the business of

enterprise applications. A series of acquisitions began, the

most notable being PeopleSoft and Siebel (and most cur-

rently, Hyperion). Objective is to become the one-stop shop

driven by its Fusion strategy on integrating all the applica-

tions under one platform.

Nestle SA More than 15 separate

programmes emost have ended.

Current: Health and Wellness.

Usually grouped by food categories such as chocolate and

confectionery to bottled water. Objective is to become the

dominant worldwide provider of each category.

Cisco

Systems

Three programmes

� 1993e2001: Networking

emerging technologies

� 2002epresent: Consumer

electronics

� Virtualisation

� Solution provider by mainly leveraging Cisco customer base

in the B2B networking space. Acquiring the technology and

scaling up using Cisco sales and manufacturing

� Dominant position in technology platforms in consumer

electronics including social networking

� Virtualization in B2B

RPM Three programmes

� Bolt-Ons

� RPM2

� Platform

� Acquiring a product and scaling up through one of RPM’s

divisions

� Acquiring entrepreneurial firms e renaissance of the original

acquisition programme which was stopped in the late 1990s

� A large acquisition to create a platform and attract products

(targets) that support the platform

Invacare Three programmes

� Extend product lines (50%)

� Expand geographically (40%)

� New distribution channels (10%)

All three programmes are continuing

category, the programme for that category effectively ground to a halt. Both the Oracle and Nestleprogrammes could be clearly identified as time-bound.

Other programmes such as the one started by Cisco Systems in 1993 could not be clearly iden-tified as time-bound. Cisco’s acquisition programme was based on buying small technologystart-ups during the 1990s. As of 1999, most people expected Cisco to continue its acquisitionsto keep pace with the evolution of networking technology. However, after the internet bubble burstin 2000, Cisco’s customers were no longer willing to use new technology as a panacea for their busi-ness problems and this acquisition programme ground to a halt. RPM had stopped its original pro-gramme of buying small entrepreneurial companies but has since restarted it as RPM2 (along withtwo new programmes e see Table 1). At the other end of the continuum, we observe programmesby companies such as Invacare that are dictated by a programme logic that is likely to be valid in theforeseeable future.

MethodologyWe use an in-depth analysis of a small sample of serial acquirers.13 Please see the Methods text box(Table 2).

Approximately 30 firms were considered in our analysis (see Appendix).In this paper we will explore processes that are common to many acquisition programmes. We

will also illustrate, with some examples, processes that are specific to more targeted acquisition pro-grammes. However, there is one characteristic that cuts across all programmes e the discipline bywhich the successful programmes stay with the processes that make the programme successful.

Long Range Planning, vol 42 2009 139

Table 2. Methods

Our research is carried out using rigorous ethnographic methods developed in anthropology (cultural studies) and

reflecting an epistemology distinct from deductive research. Data analysis rests first on becoming intimately familiar

with one’s data. The data can be in any textual form e interview transcripts, field notes, written records and

published works. The textual data are coded into relatively small units and then assembled into categories of like

units. The categories are defined, clustered into larger categories and patterns established among them. The coding

and analysis process is open-ended and highly dependent on the researcher’s scholarly purposes. The analysis, being

inductive, yields themes (descriptions of categories) that emerge from the data rather than from pre-stated prop-

ositions or concepts. The themes are then integrated with concepts from prior literature to produce interpretations,

which are themselves concepts. There is a possibility that different researchers would draw differing interpretations

from the same set of data and these interpretations can then be sorted out through a dialectic process.

The review of this paper is a testament to the utility of this dialectic process. In our initial submission, we had

identified some patterns that we thought could explain serial acquirers. However, the editor identified a bigger

pattern from the same set of data. He pointed out that the patterns that we had identified to explain the success of

serial acquirers were really explaining acquisition programmes. When we recoded our data using the acquisition

programme lens, the data provided a much better fit. For example, the lack of success by some serial acquirers such

as Microsoft could now be explained more convincingly.

Concepts of validity relevant to deductive research are not applicable to interpretive ethnographic inquiry.

According to Clifford Geertz’s discussion of thick description (thick vs thin/superficial), the test of a high-quality

analysis is not its reproduceability but its utility to future researchers. Does it produce concepts that enter into the

debates in the field? Do those concepts survive a dialectical process? Are they found to be useful in future

researchers’ interpretations of other contexts?

The reader may wonder why are we doing this e are there not theories to explain acquisitions already. Our answer is

yes there are theories but as we point out in the text and particularly in the endnotes, these theories have not been

supported by evidence in a compelling fashion. In other words, we have many theories, but we do not know how

they enact in practice.

There is a second issue. By definition only a few large firms have ever engaged in serial acquisitions. This means it

will be impossible to obtain a large sample to carry out statistical tests. This is the reason that we have chosen a semi-

grounded approach.

We have been associated with the top management of these serial acquirers since as early as 1992. However, even

though some of the acquisitions happened during our association, much of the conversation was retrospective.

There is, therefore, always the possibility of ex post rationalisation. We are cognisant of this and partly to alleviate

this possibility we have had two CEOs of these serial acquirers review earlier versions of this manuscript. They were

both comfortable with our interpretations. In spite of this, some of our interpretations are based on inductive

reasoning and a few of these have not been vetted with the companies. For example, we claimed that Microsoft does

not have an acquisition programme. We have given our reasoning in the text. But no one from Microsoft’s top

management has actually confirmed this. We have students in our class from Microsoft who concur, however. Once

again, the validity of the concepts will depend on a rigorous dialectic process which we hope to have started.

In the next sections we analyse the processes that distinguish the successful programmes. Thebulk of the discussion will focus on the more open-ended programmes, including the ones suchas Cisco that were subsequently terminated. We will devote some space to analysing the more tar-geted programmes such as Oracle and will make the case why these programmes are still more likelyto succeed than one-off acquisitions. Finally, we will discuss lessons that can be learnt from failedprogrammes.

The processes that lead to successful acquisition programmesWe have structured this section around the broad imperatives that drive all acquisitions e identi-fication, negotiation and integration (see Table 4). Within these imperatives we will explore three


common traits of successful acquisition programmes. These are the ability to identify and exploitmarket inefficiencies; the conscious striving for a win-win deal; and not deviating from establishedprocesses. While these traits have implications for all three imperatives, market inefficiencies havea proportionately larger impact with target identification, the ability to strike a win-win deal helpsin the negotiation and the discipline to stick with established processes pays the most dividendsduring integration.

Identification of targets: exploit inefficient marketsWhen it comes to identifying targets, most programmes are trying to do two things. They’re tryingto increase and improve the quality of the deal flow e superior targets that match the requirementsof the programme. From our observations, in the initial stages , the successful programmes focus onthe quality of the deal flow. This results in a string of successes that in turn attract other potentialtargets leading to increased deal flow.

Superior deal flowConrad Hall, the CEO of Trader Publishing, which publishes titles such as Auto Trader and BoatTrader and who is a very successful serial acquirer, opens his talk to our classes with this sen-tence: ‘‘We look for inefficient markets.’’14 In an inefficient market, the value potential of targetsis not widely understood. Successful acquisition programmes that target inefficient markets allhave processes (discussed later in this section) that allow them to be better informed about po-tential targets in markets where information is not readily available. Further, the lack of infor-mation means these markets attract fewer acquirers. This lack of competitive pressure givesa firm such as Trader more time, leading to better due diligence, and usually lower premiumscompared with an acquisition market with multiple potential acquirers. In contrast, all potentialacquirers basically have the same information in a well-publicised merger such as AOL and TimeWarner, or in a hostile takeover such as PeopleSoft by Oracle.15 Next, we consider some of thecharacteristics of inefficient markets in the processes that have led to successful acquisitionprogrammes.

Target markets in transition. A market going through a change (such as regulatory changes in thetelecommunications industry), emergence of a new value proposition (such as the HMOs in thehealthcare industry) or a disruptive technology (such as optical fibre and its applications in broad-band) will almost always create informational inefficiencies as the consequences of industry changestake time to be transparent to everyone. Therefore, some acquiring firms may be able to pre-emp-tively acquire the best positioned targets if they have the capabilities that allow them to understandthe implications of the market changes faster than their competitors (see later for programme-spe-cific capabilities). In the words of John Chambers:

‘‘You have to think more of a market in transition, any time you catch it in transition, that’s whenyou gain or lose market share.’’16

Michael Porter has a similar concept. He explains that there is an inherent paradox in targeting at-tractive markets for entry. Attractive markets are profitable because they are difficult to enter. Porter’ssolution: enter an attractive market before everyone becomes convinced of its attractiveness d a mar-ket in transition.17

Transitory market conditions are common in high-tech industries with short product life cycles.Transitory markets may also offer opportunities for launching acquisition programmes in matureindustries. We observe two types of acquisition programmes that take advantage of a transitorymarket opportunity. Both involve acquisition programmes where the acquiring firm buys up mul-tiple, usually smaller, targets in the same industry.

When an industry is depressed, acquisition programmes are designed to reduce excess capacityand increased efficiency by consolidating the industry. The oil industry has repeatedly witnessed


this kind of programme from the late 1960s to the present. Baker acquired many oil service com-panies in the latter part of the 1960s when the low oil prices contributed to firesale prices. No onepaid attention to Baker’s acquisitions. Baker made a bet that oil prices were likely to revert backbecause the power was shifting from western oil companies to the Gulf Arab states. This wasclearly a market in transition. The same story played out again in the late 1990s when oil priceswere approaching $10 a barrel. Companies such as Schlumberger that had made critical acquisi-tions in the late 1990s are now in a position to turn the tables on their major customers d BigOil.18

We have witnessed similar programmes in other commodities. Both Wilber Ross in the USand Lakshmi Mittal saw the firesale in steel in the late 1990s as an opportunity to supply thedemand from the rapidly-developing nations in the 21st century. Wilber Ross acquired bank-rupt steel mills in the Mid-West while Mittal acquired steel mills in ex-Soviet countries. All ofthese acquisitions were classic illustration of how successful programmes take advantage ofmarket inefficiencies. A Business Week article describing the acquisitions of Ross capturedthis succinctly: ‘‘Where others see risk he sees gold.’’ As a postscript: Ross sold his steel hold-ings to Mittal recently.19

The other type of same-industry acquisition programmes are known as roll-ups. Roll-ups are fo-cused on creating new value propositions and more revenues. Sometimes, there are regulatory oreconomic changes that enable the rolled-up company to offer products or services that take advan-tage of these changes. In the late 1980s, Banc One rolled up small regional banks to take advantageof changes in the banking laws. ABB acquired many power transmission firms in the mid-1980s inanticipation of the turnround of the demand for power generation. Nextel picked up the mobileradio frequencies across the US taking advantage of the telecommunications deregulation d a tran-sitory market opportunity in the early 1990s. Private equity acquirers have been quietly acquiringstruggling car parts companies since 2005 that Carl Icahn also wants to acquire in 2007 d from theprivate equity owners. They are not selling. Most of Nestle’s acquisition programmes can be char-acterised as roll-ups to take advantage of demographic changes d usually on a global scale.

Keep a low profileTransitory markets, by definition, imply a short window of opportunity. A common tactic used bysuccessful acquisition programmes is to keep a low profile d at least initially d in order to stretchout this window. Both Banc One and Cisco Systems launched their acquisition programmes to takeadvantage of changes in their respective industries that were being ignored by other players. Bothmade the initial acquisitions with minimal publicity until they had reached a certain size and hadalso developed a reputation for being a successful acquirer (see acquirer-of-choice later). However,in contrast to Oracle’s acquisition programme, which can be only characterised as Blitzkrieg of 20 ac-quisitions over two years, both Banc One and Cisco spread out their acquisitions over nearly a decade.

Target small/private firms. Another common practice with successful acquisition programmes, es-pecially when they are starting out, is a preference for small and privately-held targets.20 This is es-pecially more important for transitory market opportunities as the acquiring firm needs to get up toscale before the market opportunity attracts the attention of competitors. It is extremely difficult forany acquiring firm to get a jump on other potential acquirers if the target is a large, publicly-listedfirm. Trader Publications has grown through acquiring ‘‘targeted’’ classified advertising publica-tions (small local companies), recognising that they were attractive businesses that would benefitfrom consolidation under a national organisation and brand.21

This was the same practice followed by a more well-known acquirer d Cisco Systems. When thecompany embarked on its acquisition spree in 1993, John Chambers, the CEO, would avoid mergerof equals.16 His preferred targets were small privately-owned technology start-ups that Cisco knewintimately, but others didn’t. Other examples are Masco, Danaher, Newell, Parker Hannifin and justabout all the serial acquirers described in the Appendix. Banc One consistently used the followingcriteria to acquire small regional banks:


� well-managed and financially sound;� strong in retail and small business segments;� capable of establishing a dominant share position in the local market; and� less than one-third the size of Banc One

Likewise, RPM Industries based in Medina, Ohio, grew by acquiring small entrepreneurial nicheproduct firms with very high margins under the guidance of recently retired CEO Tom Sullivan.RPM had strict criteria for its acquisitions. The key among them was a 40 per cent gross profit margin.

Reducing the risks of market inefficienciesAny market that is inefficient is also risky because it is not as well understood as efficient markets.22 Thisis especially true for small and private targets. So how do you manage these risks? Very simply d youhave to have better knowledge than potential competitors. Most successful acquisition programmesdevelop this knowledge advantage using one or more of the processes described below.23

Any market that is inefficient is also risky because it is not as well

understood as efficient markets

Define your markets clearly. When firms first consider an acquisition programme, a common themeamong the successful programmes is a clear strategic analysis of the market they are considering.Consider the following quotation by the CEO of a firm that has carried out two very successfulacquisition programmes:

‘‘The first thing is you make a decision about what role you want to play in the industry and thenwhat role you can play. Those are two separate issues. Once you do that, you have to say, ‘What doyou have to do to achieve your goal?’ And you can’t get off track on it. One part is to do mergers andacquisitions. So, you’ve got to build a culture that accepts that.

Then, we said, ‘Let’s determine the product, services, and distribution needs for each segment andcombine the way of getting these products developed and sold d whether internally, through jointdevelopment or through acquisition.’ In essence, we drew a matrix for the board of directors andsaid ‘Here are the market segments we are going into.’24

The outcome of the segmentation exercise is threefold. First, it narrows down the market spacewhere the programme will look for a potential target. Second, this allows the acquirer to look withinitself to understand what knowledge it possesses to be able to evaluate a target in the selected seg-ment. Third, and most important, the acquirer can selectively augment its knowledge about the seg-ment both in terms of the value chain as well as potential acquisition candidates.25 Sum it all up,and a clearly defined programme allows the acquirer time to spot more targets in-depth, in a marketspace in which others are not focusing. This practice of defining the target market clearly is ubiq-uitous across all successful acquisition programmes. Over time, this practice ends up being a selec-tion criterion that allows the successful acquisition programmes to rapidly evaluate multipleprospective targets.

Learning by doing. Some acquisition programmes improve their insight about the target market byfirst attempting to develop the product, service or technology in-house. Cisco’s acquisition pro-gramme in the 1990s was based on offering the latest networking technology to its large enterprisecustomers. Note that this did not automatically lead to an acquisition. Cisco typically acquiredcompanies only after it had failed to develop the target firm’s technology in-house within sixmonths. The failed effort at developing the technology actually becomes an information/knowledge


advantage in evaluating the target’s technology compared with others who simply tried to acquirethe technology. Other acquisition programmes would go into a partnership (Cisco, Parker Hanni-fin) or even make a small learning acquisition to get to know the business. In an e-mail to theauthor, Conrad Hall, CEO of Trader Publications stated:

‘‘For several years we had wondered if the employment sector, dominated by daily newspapers,could be served by a targeted, local publication. We explored several concepts including thecreation of a prototype and meetings with potential advertisers to test their reaction. Theseefforts never gave us the necessary encouragement to launch plus we were so occupied withdozens of other start-ups in proven sectors that we did not want to divert scarce managementresources to something in which we lacked confidence.

Then in late 1996 we learned of a publication in Detroit that had been started by two Canadians.We quietly (emphasis ours) began an investigation and became intrigued with its strategy: freedistribution with content aimed at entry-level and blue-collar jobs. Contact was made with theowners, a luncheon meeting followed and in a few weeks we had an agreement. We closed thedeal in January 1997 having bought the only one of its kind in the United States.

The operating and financial characteristics were so attractive that we wanted to test the concept inother markets. Dallas was selected as the first one and in August the Dallas Employment Guide hitthe streets. To our astonishment it became profitable in September. A month later we launched inHouston. Two years later we were in the top 50 markets and had created a new division.’’

Long courting periodEvery merger or acquisition carries out a due diligence before sealing the deal. Basically, this is toensure that the acquirer is getting what it is are paying for d it hopes to have the right information.Unfortunately, most acquisitions, even those that succeed, are surprised post-acquisition d a resultof not asking the right questions during due diligence, or being pressed for time, sprinting to closethe deal or both. Trader Publications, Invacare, Banc One, RPM, Masco, Illinois Tool Works andDanaher would all study target markets, sometimes for years, before making a bid. We have rarelyobserved any urgency regarding an individual acquisition within a successful programme.

In many programmes, almost everyone in the rank-and-file is clued into the necessity of identi-fying the next acquisition opportunity.26 By the time the corporate development team seriouslystarts to consider a potential acquisition, much of the due diligence has already been carriedout. In sum, this practice leads to a systematic and focused information gathering that separatesthe successful programmes from the also-rans. But it is important to underscore that this informa-tion gathering is not done by an isolated group dedicated to M&A, but rather rank-and-file mem-bers in the organisation who are involved in developing the product or service or engaged inlearning more about it.27

Increased deal flowSuperior deal flow is a prerequisite to get an acquisition programme started on the right note.However, to sustain the acquisition strategy, the programme must be able to attract more poten-tial targets compared with other programmes. In the vernacular, it is known as become theacquirer-of-choice.

Superior deal flow is a prerequisite to get an acquisition programme

started on the right note

Become the acquirer-of-choice. The goal for open-ended programmes is to become the acquirer-of-choice for targets seeking an exit strategy. If targets come to you, then by definition you have


a jump on other potential acquirers. By the mid-1990s, Cisco became a solid alternative to an IPOfor many technology start-ups. In its heyday, every bank acquired by Banc One became a marketingarm for future acquisitions. Banc One could point to its acquired branches as a reference when so-liciting new targets. We find the same story repeated with Trader Publications and RPM. Once anacquirer becomes the acquirer-of-choice it has an almost insurmountable information/knowledgeadvantage in identifying potential targets for a particular programme.28 Invacare has also becomethe acquirer-of-choice in the rehabilitation market. Investment bankers (especially smaller regionalones) would often seek out Invacare or Parker Hannifin for a private deal. This should be yourultimate goal if you consider acquisitions as a growth strategy. Consider the following.

RPM made its first overture to buy Talsol in 1980. By 1980, RPM had established itself as a verysuccessful acquiring firm. However, Talsol was reluctant to sell the company in 1980 and asked fora higher price. RPM did not increase its price but kept communicating its continued interest.Finally, in 1983 the owner of Talsol agreed to sell the company. As reported in BusinessWeek:

‘‘I was coming up on 60 years old and I might be foolish to turn them down. RPM had more than30 straight years of sales and earnings increases, their management was sharp, and their stock wasvery saleable.’’ David Stebbins, CEO of Talsol.

The more interesting question to answer is how a firm can become the acquirer-of-choice. Thiscan possibly be the subject of an entire paper. However, there are four processes common to mostof these firms:

� None of these firms made a bet-the-company acquisition early on in its programme;� Most of these firms kept a low-profile in its initial series of acquisitions; and� Most of these firms worked very hard to ensure that their initial acquisitions were a success

The organisation learning literature is particularly illustrative here. This literature suggests thatby learning in small increments (including failing in small increments) these firms internalisethis learning.29 For acquisition programmes, this translates to the fourth commonly observedcharacteristic.

� Most of these firms do not use investment bankers

The last bullet is worth expanding upon as academics are also beginning to study this aspect.30

Become your own investment bankers. The reason for this should be intuitive by now. If the infor-mation rests with the investment banker, then the acquirer can hardly be expected to have an in-formation advantage in terms of identification and valuation (discussed next) compared with otheracquirers. Basically, the better acquiring firms perform the investment banking function in-house.There is a role for investment bankers and consultants in certain cases.31 But relying on these out-side agencies is not recommended for firms that rely on acquisition programmes as the foundationfor their growth strategy. The reason is fairly simple. Most casual acquirers rely on investmentbankers to give them the information advantage when making a bid. However, serial acquirers,with a well-established programme not only rely on their internal sources to identify potential tar-gets but they are also able to value a target more precisely based on their programme-specific ca-pabilities.32 It is worthwhile to explore the types of programme-specific capabilities that we haveencountered in different acquisition programmes.

Critical mass and programme-specific capabilitiesVery often the success of an acquisition programme depends on the ability to make a few coreacquisitions that form the critical mass around which the programme is built. In 2008, the


practitioner community became abuzz with Oracle’s acquisition programme that saw it make 20acquisitions between 2005 and 2007, with the aim of overtaking SAP as the leader in enterprisebusiness applications. However, the genesis of this programme was in June 2003 when Oraclelaunched its hostile takeover bid for PeopleSoft. It is unclear if Oracle had made overtures towardsPeopleSoft prior to the hostile bid, but by all accounts this was a transitory market opportunity thatwould have vanished given that this bid came within days of PeopleSoft entering into a mergeragreement with J.D. Edwards. It took Oracle two years to fend off PeopleSoft’s board and theUS Department of Justice before the PeopleSoft acquisition was consummated. However, oncethis deal was completed, Oracle moved very rapidly to acquire the other components of its acqui-sition programme, culminating in the proposed acquisition of BEA in early 2008. We will illustratethe value of one such component next.

A key component of Oracle’s acquisition programme was a company called Sigma Dynamics. Acritical outcome that the customers of the enterprise business applications are looking for is auto-mated and intelligent decision-making. Sigma Dynamics had built an engine that was used for au-tomated decision-making in its call centre products. Oracle wanted to leverage this processthroughout its enterprise business application in order to differentiate itself from SAP. In orderto learn about this process, Oracle initially contracted with Sigma Dynamics to incorporate intel-ligent decision-making within one of Oracle’s applications. Once Oracle became comfortable withthis incorporation, it acquired the company.

This example taps into multiple processes that we have described earlier d from transitory mar-ket opportunity to learning by doing. The basic principle here is that in order to develop an infor-mation advantage into potential targets, you need to acquire at least a working knowledge of theentire value chain of the market that you are targeting. This knowledge is critical in deciding whichcompanies to bring into your acquisition programme in order to gain a competitive advantage inthe target market.33 While some programmes develop this programme-specific capability throughacquisitions, the vast majority develop such capabilities internally, especially those that are not con-strained by time.

Consider the case of Nestle and its latest acquisition programme designed to give it a competitive ad-vantage in the health and well-being industry. According to Matthew Roberts, the head of Nestle’s cor-porate venture funds acquisitions and business development: ‘‘That’s where Nestle is unique d ourM&A strategy and our R&D vision are connected at the hip.’’34 Nestle’s two recent acquisitions that ex-emplify this mindset are its takeover of Novartis Medical Nutrition and Gerber, the US babyfood divi-sion of Novartis. The first acquisition was an effort to strengthen Nestle’s (programme-specific) R&Dcapabilities.

Invacare is the leading supplier of wheelchairs in the US. A critical capability to succeed in thisfield is to know which products are eligible for Medicare reimbursement. It is well known that In-vacare invests in shaping reimbursement laws.35 This lobbying practice is a key programme-specificcapability in its acquisition programmes. Consider Invacare’s acquisition of Altimate Medical in2005, a supplier of standing products for people lacking upper body strength. This was a goodfit with a lightweight aluminum wheelchair d a staple of Invacare d and also a product that Medi-care had been reimbursing. However, the critical piece of information that Invacare needed to knowis what Medicare will pay for this product in the future and not necessarily what they had beenpaying for it in the past. Many acquisitions in this field are priced on past reimbursements eespecially by financial buyers d that result in an acquisition when the reimbursement peaks.This is a recipe for failure. For example, in 2003 Medicare cracked down on a power wheelchairscompany in Houston. The entire industry suffered, including Invacare. However, Invacare saw thisproblem coming and could adjust its acquisition targets because of the importance of Medicarereimbursement as a key driver of its business. Private equity firms vying for the same targets hadno such capabilities and did not anticipate the Medicare crackdown.

For Invacare, the programme-specific capability is the in-depth understanding of reimbursementlaws. For Cisco, it is the capability to scale up a start-up firm with minimal manufacturing to thelarge volumes demanded by Cisco’s enterprise customers. Cisco’s contract manufacturing partners


can do this within months. During the 1990s, Cisco could afford to pay up for small technologystart-ups with no customers because of this capability. In order to leverage this programme-specificcapability to the full, Cisco did not like to buy companies with existing customers and/ormanufacturing facilities. Such customers and/or manufacturing facilities would have impededthe integration (see later for integration processes). Cisco was simply buying the knowledge thatresided in the company founders and did not interfere in future development of the technology.However, Cisco could afford to pay a premium for this technology because of its ability to createa large market for the technology that the small firm could never have accessed on its own. An in-vestment bank would never be able to comprehend the revenue gains Cisco could extract from theacquired technology. Initially, the capital market was also sceptical about the premium that Ciscopaid for its early acquisitions. However, soon the capital market was convinced about Cisco’s abilityto extract value from its acquisitions. The market started to routinely bid up Cisco’s stock pricewhen it announced a new acquisition.

Remarkably, there is no uniformity in how successful firms create value from the acquired assets (alsosee integration later).36 Like Cisco, Banc One (now no longer independent) and RPM would generallyleave the acquired entity to its own devices. Consequently, they are willing to pay up for a high perform-ing target that can become an even better performer by virtue of being able to increase their productiv-ity. On the other hand, Newell would aggressively improve the supply chain of the acquired firm; Ispat(now Arcelor Mittal), Cooper Industries and UTI do the same with the manufacturing processes. All ofthese firms are, therefore, willing to do turnarounds e something RPM will never do.

So what is the common pattern? All of these acquirers have developed programme-specific ca-pabilities that they could repeatedly leverage to improve the productivity of acquired companies.It is this repeatability that gives the successful programmes the confidence in their valuation ofpotential targets and facilitates a win-win deal. For this reason, UTI will never attempt financialservices acquisition where its capabilities cannot be leveraged.

However, the ability of the successful programmes to be more precise in the valuation of an ac-quisition goes beyond capabilities to increase the productivity of the acquired assets. This is dis-cussed next.

Repeatability gives the successful programmes the confidence in their

valuation of potential targets and facilitates a win-win deal

Negotiation: work towards the Win-Win dealConsistently overpaying for acquisitions will doom any acquisition programme. In spite of this, wenoticed a lot of variation in how successful acquisition programmes decided on a fair price exceptfor one commonality. A part of the valuation is contingent on what the target can deliver to theprogramme. One word of caution. This combined value is not the conventional notion of synergy.37

In fact, with a few exceptions, most of the successful programmes have allowed a large degree ofautonomy to the acquired entities and have refrained from trying to extract so-called synergies.

Inefficient markets and acquisition premiumsWe have previously mentioned how many of the successful acquirers seek out small and/or pri-vately-held firms because these markets are likely to be relatively inefficient. Thus, deals withsmaller firms, especially private middle-market firms, can be closed without too much attentionfrom the capital markets and usually at a lower premium. There is also another advantage whennational and well-capitalised acquiring large firms such as Danaher, Masco or RPM make an acqui-sition in relatively inefficient middle markets. They can make a higher offer than what the targetfirm can get from a local business and still get a good deal because the target adds to the overallprogramme much more than a standalone firm.38 This is a classic example of a win-win deal.


In 1997, Wayne Huizenga was creating his AutoNation superstore used car dealership by buyingup local dealers all over the country. One of the car dealers who sold to Huizenga recalls how hewent into the meeting with Huizenga ready to drive a hard bargain. Huizenga’s opening offer (inAutoNation’s stock which at the time was flying high; see next section on deal structure) was onehalf higher than the owner’s starting price. The meeting was very short!

Now, contrast small private deals to what happens when a deal is widely publicised and/or is notpart of a programme. Sometimes acquiring firms may perceive transitory market opportunities thatcan only be capitalised by the acquisition of a large firm. There is some research evidence that ac-quirers feel pressured into unjustified premiums when they get caught up in an auction or a biddingwar situation that can lead to the winners curse.39 AT&T had to raise its original $85/share bid inOctober 1990 to $110/share to overcome the resistance from NCR management d a premium fromwhich it could never recover. Typically, the capital market frowns on these kinds of acquisitions,even ones that ultimately prove to be successful such as Merck’s acquisition of Medco in 1993. SinceMicrosoft announced its hostile bid to acquire Yahoo! in February 2008, its stock price suffereda steep decline. We will make the case later that Microsoft’s acquisitions do not qualify asa programme.

Deal structureMost acquiring firms’ stock prices fall at the time of an acquisition announcement. It goes withoutsaying that acquirers that do not suffer this decline will be at a competitive advantage comparedwith other acquirers. One reason that Yahoo! rejected Microsoft’s offer was the total value of theoffer declined precipitously as the stock swap part of the deal lost value when Microsoft’s stockprice declined post-announcement. Successful acquisition programmes typically avoid this problemas their stock prices (the currency for a stock swap acquisition) remained high after they had madean acquisition announcement.40 Banc One’s strong p/e ratio, relative to other banks, gave it greaterpurchasing power and was an essential ingredient in the bank’s ability to make non-dilutive acqui-sitions. The same was true for GE Capital and Cisco.

Typically, an elevated stock price signals a confidence by the market in the firm’s ability to createvalue through the acquisition programme.41 In order to use the stock price as currency, the acquir-ing firm needs to establish credibility with the financial markets. There is research evidence that theannouncement of acquisition programmes is one of the rare acquisition-related events that may bepositively valued by the markets.42 However, there is more to this. Firms such as General Electricand Cisco Systems not only possess highly-regarded acquisition programmes, but also have a strat-egy of clearly communicating the logic of each individual acquisition to the financial markets. Ofcourse, most firms try to communicate the logic of an acquisition at the time of the announcement.The fact that some acquiring firms can keep their prices from declining possibly has to do morewith the market’s conviction about the acquisition programme rather than the communication.No empirical studies have investigated whether a communication strategy can have an impacton stock prices during acquisition announcements.

In a stock swap acquisition, the acquirer with the elevated stock price can get away with manymistakes. None of the successful serial acquirers, which used stock swap as their means of payment,would have been able to carry out the programmes without the support of the capital market inpropping up their stock price. Our advice to managers: by all means take advantage of what youperceive to be an elevated stock price. However, if you are the target and you suspect that the ac-quiring firm’s stock price is elevated artificially, then you need to be very careful. Time Warnerprobably regrets its stock swap deal with AOL. Huizenga created AutoNation by buying up smallcar dealerships using AutoNation stock; stock that lost its value precipitously. Many of the car deal-erships that sold to Huizenga when AutoNation was the darling of Wall Street went under water.

Not all successful acquirers use stock swaps. In particular, Invacare and RPM use debt to struc-ture all-cash deals. The reason for this is simple. Invacare can predict its cash flow much better forthe healthcare market than a cyclical market such as technology equipment or even cars. This pre-dictability is also enhanced by Invacare’s programme-specific capability in understanding


reimbursement laws. With predictable cash flow, debt financing becomes very attractive as it allowsyou to increase your return of equity. Like everything else, successful acquisition programmes willstructure their deals based on the underlying logic driving the programme.

Pre-empt auctions e if you can exploit market inefficienciesAs we have noted previously, most successful acquisition programmes avoid investment bankersand in particular auctions which completely negates the advantages of playing in inefficient mar-kets. We have seen some examples of the firms in our sample pre-empting auctions very success-fully. The secret of their success is the superior knowledge they have acquired using the tactics thatwe enumerated in the previous section, in particular the long courting period.

Most successful acquisition programmes avoid investment bankers

Just about every acquiring company in our sample has multiple examples of acquisitions thatlasted more than five years from first contact to deal close. This long courting period gives theseacquirers tremendous insights that are impossible for others to match. Consider the following.(this and other examples involving RPM are paraphrased from many conversations betweenTom Sullivan and the author). Tom Sullivan of RPM had been pursuing Carboline Company since1971. In 1979, he had tried to buy the company from its founder but Sun Oil prevailed with a higherbid. However, Sullivan did not accept defeat. After Sun had closed on the deal, Sullivan wrote to theCEO of Sun saying: ‘‘Some day, you’re going to get rid of this company. When you do, I want to beon the top of your list.’’ Sun Oil was ready to divest Carboline in 1985 and it hired LehmanBrothers to carry out the auction. Mike Tellor who had joined Carboline in 1972 and was nowin upper management alerted RPM. RPM waited until the news was public, and then madea $60m pre-emptive bid (it would not participate in the auction if this was refused). Lehman triedseveral times for a higher bid but finally gave in. How did RPM know the offer that will successfullypre-empt the auction? This is where the long courting period comes in handy. RPM knew of a con-tract that Sun had signed with Carboline’s managers that gave them a bonus for any deal that theynegotiated over $55m. RPM simply took advantage of their superior knowledge in an inefficientmarket. The deal never went to auction. Now consider another example.

Rust-Oleum was a highly popular brand of rust-proofing products in which RPM was interestedsince the early 1980s. In 1991, Rust-Oleum wanted to sell its European business which cateredmainly to industrial customers. Tom Sullivan was really interested in the US business. However,he decided to buy the European business under an arrangement in which RPM could licensethe Rust-Oleum brand for 50 years, as well as have the ability to sell any new technologies andproducts that Rust-Oleum developed in the US. The second condition was critical for RPM be-cause RPM’s parent organisation had no ability to help the technology development of any ofits acquisitions e all the acquired companies were left to their own devices. Without this clarityabout its acquisition programme, RPM may have been content with just acquiring the right to li-cense the brand.

RPM made a successful pre-emptive bid of $34m for this right. In 1995, the rest of Rust-Oleum wasavailable for sale and the company hired Lehman Brothers to carry out an auction. The asking pricewas $200m. RPM made an offer for $190m which it believed was a fair price (particularly since it hadthe European operations and the other associated rights). Its offer was turned down. However, it soontranspired that no bids were forthcoming for $200m and not even for $190m. The genius of acquiringthe European business and the right to use any new technologies was now becoming apparentdnoone was interested in acquiring the US entity while RPM held on to the European business, alongwith the luxury of utilising any technological breakthroughs. Even strategic acquirers that could investin new technology were turned off by the proposition that RPM would get a free ride on their break-throughs. In the end Rust-Oleum accepted a bid for $176.5mdnearly $15m less than RPM’s original


bid. This was a 15-year process! This is only possible because of the clarity that RPM had about thefactors that drove the success of its acquisition programme.

Now consider the acquisition of Rowntree by Nestle as part of its chocolate and confectioneryprogramme. Rowntree had sold Hershey the rights to market KitKat in North America prior toits acquisition by Nestle. As part of the acquisition, Nestle acquired the rights to market KitKatin other parts of the world. Nestle was successful in this acquisition even though the North Amer-ican business had been sold to a competitor. Is this similar to the Rust-Oleum situation? UnlikeRPM which did not have any ability to help the technology development of Rust-Oleum, the choc-olate and confectionery group of Nestle was eminently capable of introducing new products underthe KitKat brand name. Also, Nestle was less focused on North America. Both acquisitions werewin-win deals because they drew on different sets of programme-specific capabilities.

Ability to pay a higher price because of programme-specific capabilitiesTom Sullivan recently retired as CEO of RPM after a 20-year period of growth in earnings that wasprimarily driven by by its ongoing acquisition programme based on high-margin niche products inthe paints and coatings business. When asked about valuation, he has one word of advice: you can-not pay too little for a bad acquisition. His philosophy is simple e do your homework and then paya fair price. Tom Sullivan does not believe in starting with a negotiating price; he offers what heconsiders to be a fair price and sticks to it. This sounds like generic advice but to really understandhis thinking we had to approach his negotiation techniques from multiple perspectives and exam-ples. Consider one example.

In the late 1990s, a small specialty manufacturer of roofing material was ready to be sold as theowner wanted to retire. RPM was the acquirer-of-choice and the son of the owner set up a meetingbetween Tom Sullivan and the owner. The company was profitable and had a gross margin of 25per cent. The owner wanted to sell the firm at a multiple that was well within the norms of middle-market companies selling in the region. However, Tom Sullivan did not make an offer. The son ofthe owner was very surprised. When pressed, Tom Sullivan said that he was willing to offer a highermultiple provided the firm could boost its margins to 40 per cent. Clearly, in Tom’s perception, thefirm had not yet demonstrated its full potential.

A Q&A with one of our classes may be worth repeating here to underscore the need for multipleperspectives. When Tom Sullivan had originally told us this story, we had assumed that the refusalto make the acquisition was simply a rote adherence to the 40 per cent margin criterion. However,when one of our students challenged Tom Sullivan that he was leaving money on the table (by pay-ing too much later), the true rationale came out. RPM leaves the acquired entity completely on itsown. A 40 per cent margin ensures that it can fight off potential entrants but a 25 per cent margin(even though it is very profitable) leaves it vulnerable and, therefore, a potential headache for RPM.The reader should note this subtle difference between RPM’s thinking and the conglomerates of the1960s that simply relied on financial criteria. Tom Sullivan does not accept that the logic of his pro-gramme is that of a conglomerate or a LBO/private equity-type-acquirer (the present crop of pri-vate equity firms dislikes being compared to the 1960s era conglomerates such as ITT or LTV). Ittook us some time to realise the real difference d RPM is enabling the acquired company to bemore productive by leveraging RPM’s programme-specific capabilities. In contrast, a private equityacquisition often simply improves the efficiency of the acquired entity and/or gets rid of poorly-performing assets.

Ispat (now Arcelor Mittal) Steel acquired a Polish steel plant for $1bn in 2004. US Steel, whichbid against Ispat for the Polish plant, thought the price tag was too high and abandoned the auc-tion. How does Ispat pay a premium? When buying out-of-favour plants, Ispat usually gets taxbreaks from governments and also gets a guarantee to buy iron-ore and coal mines, sharply reduc-ing the costs of shipping these raw materials from Brazil or Australia. US Steel was only looking atthe acquisition in isolation. This is negotiation that draws on Ispat’s ability to exploit market in-efficiencies. Of course, Arcelor Mittal supplements its negotiation with its programme-specificturn around capability.


Intangibles can reduce the actual premiumIt may also be possible to offer intangible inducements to the owners of small firms that are notpossible in larger acquisitions. Such inducements may help reduce the premium. For example,RPM frees up the managers (usually the ex-owners) of the acquired firm to concentrate solelyon running the business dthings that they truly enjoy. Thus the acquiring firm’s managementdoes not have to deal with health and safety or tax issues, as the headquarters staff handles these.We have heard this story from many programmes in our sample d Danaher, Masco, Lubrizol, toname a few. Typically, these intangibles lead to a virtuous cycle when a serial acquirer becomes theacquirer of choice.

Integration: stay with the successful processesThere has been a fair amount of academic research done in the area of integration with some verygood insights.43 However, none of this research explicitly addresses the difference between integra-tion in one-off acquisitions versus acquisition programmes. For successful acquisition programmes,integration is rarely a problem. The integration is closely tied to the programme logic and there isa high level of clarity about the impact the integration will have in delivering the expected returnsfrom the acquisition. The successful programme may fail in execution from time to time but itrarely makes a logical error in structuring the integration. Unfortunately, this mistake is far toocommon in one-off acquisitions. Consider the following example.

The reason for the acquisition should drive integrationIn 1999, Prudential acquired Volpe Brown, the boutique Silicon Valley investment bank, in order toget into the booming internet firm’s underwriting business. During its negotiations with VolpeBrown, Prudential’s dealmakers drew up a list of 12 bankers and analysts considered critical tothe firm’s value. Yet many of these critical personnel left when Prudential closed Volpe’s tradingdesk and integrated the trading operations with Prudential’s own. Yes, Prudential paid a premiumto buy the underwriting business. However, trying to recover the premium by consolidating thetrading desk was the wrong integration priority.

The successful acquiring programmes are incredibly disciplined in their integration strategy. Theactual implementation of the integration process will vary with the specifics of the programme andthe degree of anticipated difficulty in the integration. For some acquirers, integration is complexand is critical for success. For example, Newell (now Newell Rubbermaid) had been very successfulin acquiring small firms that sell household furnishing and kitchen equipment through the massmerchandisers. Newell had a fairly complex integration process called ‘‘Newellization’’ that allowedthe acquired firm to hit the ground running without affecting service to its customers. For others itis not very involved. One factor that mitigates the degree of difficulty is the size of the target.

Target sizeEarlier we had suggested that successful programmes have a preference for small size acquisitions,especially initially. There is also some empirical evidence that it is easier to integrate smaller targetsthan larger ones.44 This is intuitive as smaller targets present both a smaller scale as well as a lesscomplex integration. Further, small acquisitions are less likely to suffer from the ego problems ofthe owner. There is, however, a caveat. Quite often the value in small firms resides in their humanresources and turnover of key employees has to be avoided at all costs.45 Cisco, for example, useslack of employee turnover as a metric for its acquisition success. Next, we consider some othercommon processes that cut across most, but not all, acquisition programmes.

Small acquisitions are less likely to suffer from the ego problems of the

owner


A preference for integrating the back end onlyPrudential may have been able to generate cost savings by integrating the trading desk if it did nothurry the process and antagonise the key traders. These traders were the first line of contact with thecustomers.46 Most of the successful acquiring programmes are very wary of integrating customer-facing functions. However, most have shown a preference for integrating some of the back-endfunctions. RPM, Masco has practically no integration at all. Banc One, on the other hand speedilyintegrated back-end services. Banc One’s motto of ‘‘share and compare’’ and ‘‘uncommon partner-ship’’ captured the essence of Banc One’s acquisition programme. ‘‘Uncommon partnership’’ im-plied that local management retained autonomy on issues of pricing and a range of choices onproduct offerings, yet could quickly tap into Banc One’s wealth of experience and technology.This brings us to the next practice where there is a range d speed of integration.

Speed of integrationThe conventional wisdom across practitioners is that integration should be as fast as possible. Someacademics are now beginning to study this issue.47 The basic logic of this advice is indubitable. Inmost of the programmes that we have studied, the speed of integration is very fast. However, someof them took their time rather than mess up their customers.48 If the acquiring firm is simply help-ing the acquired firm to develop a strategic planning process (see below) or provide back officesupport, then integration problems are not a major issue. Banc One usually opted to integratethe back-end in less than one month. Since the acquired firm retains its separate organisationalidentity, there is less room for conflict.49 However, we observed that the successful programmesknow to integrate just enough to benefit from the scale advantage of a larger organisation and si-multaneously, help the acquired entity to be more productive. Most successful programmes aska variation of the following questions during due diligence when integration planning has to start.

� What are some of the anticipated difficulties in extracting cost synergies?� What are the implications of the integration activities on customers?� What are our maximum points of leverage with minimum disruption of the target business?� What is the sequence by which various components should be integrated?

As an aside, this is a big gap in academic research possibly because this sequence and degree ofintegration may be impossible to study in a large sample design.

Consider three successful programmes in three totally different industries and life cycles. RPM’s prac-tice was to take over the back office functions of the target, thus giving the key asset of the acquired com-pany d the owner entrepreneur d more time to develop its business. Banc One, as we described earlier,followed the exact same practice at the retail customer interface but was much more integrated in theback end compared with RPM. In contrast, Cisco Systems had a more complicated integration strategyfor its programme during the 1990s. Cisco left the R&D, marketing and product development with thebusiness unit while the sales and customer service were integrated back into Cisco. It is instructive tostudy the different phases of Cisco Systems’ integration strategy as illustrated in Table 3.

It is clear that Cisco is much more deliberate with customer-facing integration. Back-office in-tegration such as benefits and pension plans do not even appear in this table, as they are donewithin days of the acquisition close. This is a very simple formula that all acquiring firms, especiallyone-off acquirers, should consider: integrate the back office and tread very carefully when integrat-ing customer-facing activities.

We will end this section with the example of a one-off acquisition by FedEx where this advice wasput into practice. In 1997 FedEx acquired RPS to develop a ground delivery capability that couldcompete with UPS. FedEx took nearly three years to integrate RPS into FedEx ground.50 FedEx andRPS did not have much internal similarities. For example, all the RPS trucks are owned and oper-ated by their drivers. In contrast, FedEx uses its own employees to drive its trucks. In our opinion,FedEx was very smart to delay this integration as the expectations of FedEx customers are very dif-ferent from RPS customers. Most acquisitions and even some programmes fail to account for this.


Table 3. Cisco Integration Phases Chart

Announce to Close Close to 90 Days 90 to 180 Days 180 Days & Onward

‘‘Announce’’ ‘‘Getting Started’’ ‘‘Leveraging Cisco’’ ‘‘Cisco Mainstream’’

� HR Focus

� Equity/Compensation

� Communications

� Set Goals

(Rev, Products, People)

� Establish Budgets

� Define Organisation

� Market Positioning

� Establish Integration

Team

� Integration Pre-Plan

� Employee Payroll

Conversion

� Facility Planning

� Sales/ Training

� Product Roadmaps

� Revenue Plan

� Sales Strategy

� Services Strategy

� Manufacturing Planning

� Ramp Up Sales

� Measure Plan

to Actuals

� Field Training

Programmes

� Cisco Executive

Visibility

� Special Focus

Programmes

� Execute Mfg. Plan

� Maintain People Focus

� Mainstream Cisco

Product Line

� Full Product

Integration

� BU Maintains

focus on Goals

� Sales Teams

Self Sufficient

� 2nd Generation

Roadmaps

� Perform Audit

on Retention/Revenue

� Maintain People Focus

Source: Cisco Acquisition Strategy & Process Presentation, Cisco Systems 2000.

Establish a planning disciplineMany programmes that focus on smaller targets allow the acquired entity a large degree of auton-omy. One common practice for this type of programme is the imposition of a planning discipline,which many of the small entrepreneurial acquired firms frequently lack. Part of the reason why thisworks is that prior to the acquisition, the entrepreneurial target rarely had the time to engagein a formal planning process. Being freed from many of the non-productive functions post-acquisition, they embrace planning not as a chore but as a sounding board for their strategicdirections. Another reason why this works is that the target would not be able to grow to thenext level without a planning discipline, as the complexities of the business make it very difficultto carry out seat-of-the-pants management. Banc One relied on this ability to help its acquiredbranches grow in the early 1990s. Both RPM and Masco use the same principles to this day. Wehave talked to many acquired entities of the firms mentioned in the Methodology appendix. Almostwithout exception they were shocked when they first learned about the planning deliverables andsome questioned the necessity of the exercise. Almost without exception they were pleased afterthe fact. This experience actually made it easier to entice future targets to join the fold.

While acquisition programmes seem to have a higher batting average than one-off acquisitions,they are not perfect. We have observed major failures with one or more acquisitions within a pro-gramme. We have also observed entire programmes fail. In the final section of the paper we willexplore why some acquisition programmes fail.

Why programmes failThe academic research about the value-creating potential of serial acquirers is ambiguous at best.However, the few studies that have directly investigated acquisition programmes are much morepositive about the value-creating potential of programmes compared with serial acquirers. Inthis final section, we would first like to draw a clear distinction between serial acquirers and acqui-sition programmes and why it is so difficult for serial acquirers to succeed in their acquisitions inthe absence of a clearly-described acquisition programme. We will use Microsoft’s acquisition asa case study.

Not all serial acquirers have an acquisition programmeMicrosoft has made multiple acquisitions almost every single year since the 1990s. Many of theseacquisitions can be traced to the acquisition of a technology e similar to what Cisco had done in


the 1990s. However, in contrast to Cisco, none of these acquisitions could be tied back to a coherentprogramme logic. In the 1990s, Cisco’s mantra was volume. A key driver for its success was its pro-gramme-specific capability represented by its value-added resellers (VARs). Cisco’s VARs were veryadept at getting Cisco’s customers to accept most of the technology that Cisco acquired, often be-fore Cisco made the acquisitions. So Cisco was taking very little technology risk and the only ca-pability that it needed was to be able to scale up a small technology start-up in order to serveCisco’s customers. Cisco drew on its programme-specific capability of outsourced contractmanufacturing to get this to work.

Many of Microsoft’s largest acquisitions have centred on internet technology. Consider the ac-quisition of WebTV and Hotmail in the 1990s. WebTV enabled its subscribers to access theirmail through the TV. Unfortunately, WebTV’s subscriber base barely reached 1 m and could neverjustify the hundreds of millions of dollars that Microsoft paid for this acquisition. As far as Hotmailis concerned, it seems that Microsoft made this acquisition simply to eliminate a potential rival inthe e-mail market.51 Hotmail has been pretty much left alone. While both of these acquisitions hade-mail technology in common, they were not considered as part of a programme that could leveragee-mail in the programme’s business model. For all practical purposes, they were treated as stand-alone acquisitions. Both of these failed to justify the acquisition premium.

The internet crash has not deterred Microsoft from making acquisitions. It could be that theemergence of Google as the giant in the search business has increased Microsoft’s urgency. In2006, Microsoft paid $6bn to acquire the advertising platform of aQuantive d its largest acquisi-tion to date. This was nearly an 85 per cent premium. Some published reports suggest that on av-erage Microsoft has paid a 41 per cent premium for its 48 acquisitions between 2000 and February2008, compared with a 25 per cent acquisition premium for other tech acquisitions.52 Microsoftclaims that it is trying to fill the gaps in its existing businesses by making selected acquisitions.What remains unclear is whether these acquisitions add up to a coherent programme. None ofits businesses other than Windows, Office Suite and Developer Tools has ever returned a profit(at the time of writing, Xbox may be the fourth business that barely turned profitable on an oper-ating basis). This may have led to the resignation of Microsoft’s chief acquisition architect in early2008.53 Coincidentally or not right after this resignation, Microsoft announced its hostile bid to ac-quire Yahoo for more than $44bn at a 61 per cent premium.

It is not surprising to us that Microsoft is not put up as a model for acquisition success. In spiteof the numerous acquisitions that it has undertaken, most of the acquisitions are ad hoc and one-off. Further, there seems to always be an urgency about the manner in which Microsoft goes aboutits acquisitions that is absent in the negotiation we have observed in successful acquisition pro-grammes. It may be too early to pass judgment on all of Microsoft’s acquisitions but in generalit is very difficult to recover once you have paid too high a premium.

Transferring business logics across programmesCisco is one of those acquiring companies that successfully transitioned into a new acquisition pro-gramme after the internet crash, as the old logic of pushing the latest technology on to its customerswould no longer work. In a remarkable transition, Cisco is now rewarding its VARs not for volumebut the perceived value they are adding to Cisco’s customers. This has led to a complete reworkingof the sales compensation function. However, this underscores the recognition by Cisco that oncethe business logic of a programme changes, it can no longer rely on the earlier capabilities. Let usillustrate what happens in acquisition programmes where this recognition is absent.

Consider AutoNation e the programme started by Wayne Huizenga in the late 1990s to createa used-car super dealership. Huizenga had the credentials to come up with a new business model forcar retailing. He had revolutionised video rental (Blockbuster) and waste collection (Republic In-dustries) with similar acquisition programmes. In 1997, Wall Street was in love with AutoNation’sstock and Huizenga paid top dollar for the trophy dealers in large metropolitan areas d usuallywith restricted stock. One leading Cleveland dealer was not convinced about AutoNation’s strategyas the used car business is extremely complex and localised. Basically, he questioned if


AutoNation could have any advantage by being able to aggregate used car dealerships over a largeregion. He was the only dealer in this large metropolitan area that insisted on unrestricted Auto-Nation stock and sold it six days after the deal closed. He was lucky, because all the other dealersthat took on restricted stocks saw their wealth slipping away when AutoNation’s stock plummetedand the used car business, AutoNation’s main thrust at that time, was abandoned. During the in-tegration of acquired used car dealerships, Huizenga made a fatal mistake. Huizenga tried to exportthe Blockbuster acquisition programme logic to used car retailing. He replaced the seasoned pur-chase teams of the acquired dealers with his own people much like he did at Blockbuster. Unfor-tunately, the model of renting a homogeneous product such as movies did not transfer to theidiosyncratic demands of the used car business. What was our takeaway? Even if you are successfulwith a prior acquisition programme, you need to construct the programme logic from scratch whenyou’re embarking on a new acquisition programme. As we stated early in this paper, the internalsimilarities in making acquisitions work are only valid within a programme and not necessarilyacross programmes. If the logic of the programme is flawed, as we saw in the case of AutoNation,there is no experience to build on.

Violating acquisition criteria within programmesThe reader may think that ‘‘experience’’ within an acquisition programme is more likely to betransferable. Surprisingly, even with the same team in place, acquisitions can still fail within thesame programme. Research in organisation learning suggests that sometimes repeated successcan sow the seeds for failure.54 The reason is usually overconfidence leading to a deviation fromthe repeatable process. Unfortunately, this happens even to the best.

Even with the same team in place, acquisitions can still fail within the

same programme

Even successful acquisition programmes will occasionally make a poor purchase. If these failedacquisitions are relatively minor, the programme can ride out the mistake. However, more oftenthan not, failed acquisitions are caused by trying to acquire a company that is larger than whatthe programme capabilities can absorb. Newell has been described as one of the most successfulserial acquirers. Newell had a simple logic for its acquisition programme. It would make an acqui-sition only to expand or defend its shelf space with mass merchandisers such as Wal-Mart or Target.Newell would typically target a well-known brand that had fallen on hard times but is otherwisesuitable to be sold through mass merchandisers. Post-acquisition, Newell would completely revampthe supply chain of the acquired entity using a process called ‘‘Newellization’’, so that it could pro-vide a high level of service that Wal-Mart had come to expect from Newell. Even though the endobjective was to make the target company more efficient than before the acquisition, Newell wouldincrease the inventory during the integration process so that there was no disruption of the serviceto Wal-Mart. However, Newell’s string of successful acquisitions came to an end when it tried andfailed to integrate Rubbermaid. Newell executives readily admitted to us that ‘‘Newellization’’ brokedown in this acquisition. Rubbermaid fit all the criteria that Newell looked for in a target except forone factor e size.

Even Cisco has had its failures. One of Cisco’s programme-specific capabilities was the informa-tion advantage it had with respect to the utility of emerging technologies for its customers. Cisco’snetwork of VARs and vendors were clued into Cisco’s acquisition programme. They were the front-line for shifting through acquisition opportunities before a technology appeared on the radar ofothers. Unfortunately, Cisco failed to spot the initial opportunity in optical networking, whichmeant that it had to undertake catch-up acquisitions. Two of these acquisitions ended up beingquite expensive.


Consider the acquisition of Cerent by Cisco. At the beginning of 1999, Cisco had little fibre-opticexpertise and was in danger of being shut out of a huge market. In an effort to catch up, Cisco de-cided to bid for Cerent, which produced gear that made it much cheaper to move telephone callsand computer traffic on and off fibre-optic lines. The rationale for this acquisition was very muchlike most of Microsoft’s acquisitions e reactive rather than proactive. What follows is an excerpt ofa conversation between Cisco CEO John Chambers and Cerent chief executive Carl Russo.

‘‘I don’t think I can afford you guys,’’ Chambers told Russo. ‘‘I don’t think you can afford not to,’’Russo replied. By the summer of 1999, Chambers was ready to move. He believed Cerent would bea good fit. Its 100-member sales team, unusually large for a start-up, resembled Cisco’s high-octanesales staff.55

Cerent (along with a second optical area acquisition Monterrey) turned out to be a mistake.Cisco got into a high-pressure negotiation which it usually avoided. Second, it deviated from itscriteria of acquiring only early-stage firms, preferably with no customers. Cisco was accustomedto scaling up the manufacturing of the acquired firm and selling it to its own customers. It wasnot very good at managing a new set of customers that it did not understand. This deviationfrom practice usually has poor results. Why? Because the firm cannot use its prior learnings.

There are other examples. In the early 1990s, Banc One paid $513m to buy unprofitable M. Cor-poration of Texas, violating the one-third the size criterion, and paid the price. RPM, in contrast,made its mistake early and developed successful processes based on the lessons it learned. Back in1966, learning that Reardon, the maker of waterproof coating product Bondex, was on the market,RPM set its sights on acquiring it. However, instead of calling on Reardon, RPM put up a targetedad stating that RPM was interested in buying coating companies. Pretty soon, Reardon came callingand the acquisition was negotiated in private. This was a positive lesson. By negotiating the deal inprivate, RPM avoided a bidding war and took advantage of an inefficient market. What followed afterthe acquisition led to a different lesson. One month after the deal closed, the young Tom Sullivan wentto Reardon’s headquarters in St Louis and fired the entire top management! This act nearly shut downReardon’s operations and Sullivan had to quickly rehire some of the key people at twice the salary andhalf the productivity. However, some of the management team did not return. Subsequently, RPMfound it very difficult to run Reardon because it operated very differently than RPM’s practice ofonly selling to order. Since Reardon was approximately the same size as RPM at the time of the ac-quisition, this stumble could have been quite grave. Lesson learned: acquire small companies, nego-tiate in private, keep existing management and let them run the company. That was also the last timethat RPM used an investment banker. RPM has rarely deviated from these processes. Note, however,that these lessons are specific to RPM. If you’re planning to replace existing management, privatenegotiation is not that important and even hostile bids might work.

Some suggestions for practiceTable 4 summarises the common traits of successful acquisition programmes that we have identi-fied for the three broad imperatives in an acquisition. These are the ability to identify and exploitinefficient markets, the ability to structure a win-win deal and the discipline to stay with successfulprocesses that have worked in the past.

In the individual cells we have described different tactics by which the successful programmes inour sample have implemented these processes. While most of these processes were based on ourstudy of acquisition programmes, some of these should also be followed by the one-off acquirer.For example, most of the processes that we have described in the column under integration willequally apply to acquisitions that are part of a programme or a one-off acquisition. Even if you’reconsidering a comprehensive integration, it is probably prudent to integrate the back end first be-cause this is likely to be least disruptive to your customers. Of course, developing a core compe-tency for improving productivity across multiple acquisitions within a programme does notapply to a one-off acquisition.


Table 4. Key Processes that Contribute to Success in Acquisitions

Acquisition Stages\

Common Objectives

Identification Negotiation Integration

Exploit Market

Inefficiencies

� Superior Deal Flow

B Target markets in transitionB Keep a low profileB Small Private Dealsa

B Learning by doingB Define your markets clearly and

narrowlya

� Increased Deal Flow

B Acquirer-of-choiceB Become your own investment bankersB Involve rank and file in identifying targets

� Lower Premium

B Small Privat DealsB Ability to pa higher premiumsB Become the quirer-of-choicea

� Deal Structure

B Avoid Auctio Situationsa

B Pre-empt au ions� Programme-spe fic capabilitiesa

B Value target igher than other

acquirers

� Programme logic

B The reason for the acquisition

should drive integration a

B Retain key peoplea

B Target size

Work towards the

Win-Win Deal

� Reduce the risk of inefficient markets

B Define your markets clearlyB Long Courting PeriodB Become your own investment bankers

� Acquirer of cho ea

B Intangibles c reduce

the actual pr miuma

� Acquirer of choicea

B Retain key peoplea

B Give target employees an incentive

to succeeda

Stay with Successful

Processes

� Maintain objectivity

B Be careful if you find yourself

rationalising an acquisitionB Maintain continuity of

acquisition team

� Walk-Away Poi

B Know when walk out e

rationalisatio is dangerousB Maintain co inuity of

acquisition t m

� Sequence and speed of integrationa

B A preference for integrating the

back end onlyB Speed of integration

� Programme specific capabilitiesa

B Establish a planning disciplineB Maintain continuity of acquisition team

a Represents processes that most acquirers may consider seriously.

LongRangePlanning,vol42

2009

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Even for the acquirer considering a programme, Table 4 should be used as a starting point. Theexact process that you adopt will depend on the logic of your programme. For example, if you’reoperating in a highly turbulent environment, it may be useful to develop a process to take advan-tage of markets in transition. On the other hand, if your business is in a mature and steady envi-ronment, your best chance may lie in developing a programme around the acquisition of smallprivate firms that most of the big players are ignoring. A technique that we have found useful isto have a group brainstorm around the different processes described in the cells to arrive at action-able plans.

Closing thoughtsWhat we have observed is that the successful acquisition programmes have an intrinsic advantage inall three stages of an acquisition d target identification, negotiation and integration. It is simplynot possible to capture the drivers of this advantage by counting the number of prior acquisitionsor market similarities between the acquired and the acquiring firms using SIC codes. For example,large sample empirical studies can rarely capture our finding that for every acquisition that getscompleted, the successful programme is scanning through many more that they reject (dealflow). However, deal flow by itself may not lead to a successful acquisition programme d afterall, there are plenty of investment bankers willing to push as many acquisition prospects as youcare to look at. Not only do these successful acquirers have access to a higher volume of deal flows,usually through internal digging, but the selected target also has a much higher likelihood of successbecause of the time and accumulated knowledge that goes into investigating each prospect. Just likethe best tennis players seem to be never hurried when making a shot, these successful programmesseem to have all the time in the world in closing a deal. In the end, they are able to make a muchbetter assessment of an acquisition than the also-rans. The common theme is that these firms aresuperb at exploiting market inefficiencies, which are more likely to lead to win-win deals, using a re-peatable practice.

We need to repeat an important caveat. These are processes; some are common to most success-ful programmes. However, the tactics by which different firms have implemented these processesvary. For example, all successful acquirers adhere to the practice of improving deal flow. However,some firms such as RPM use a few people at headquarters to do all the investigation, while otherssuch as Illinois Tool Works and Invacare use rank and file employees to dig up prospects.

There are several questions that remain unanswered. Perhaps the most important is the issue ofdeviating or changing the processes that have made a programme successful in the past. We knowthat even successful programmes have made mistakes by pursuing acquisitions that simply did notmatch existing processes. However, we have not studied the reason behind this in a systematic fash-ion. Is it simply overconfidence leading to hubris? Or are these mistakes almost inevitably due topressures from the capital markets?

The mistakes that we have observed across programmes are probably more easily understood.You have to work your way through the programme logic every time you launch a new pro-gramme. Huizenga’s unsuccessful venture into car retailing is a prime example. We are veryfamiliar with the process by which Cisco reprioritised its capabilities after the internet crash. Bot-tom-line, the acquisition programme logic has to be rooted in the principles of competitive ad-vantage. How might you deliver what the customer wants and capture part of that value for yourshareholders?

Another question that may be worth investigating is the first few acquisitions that seem to be socritical in setting the stage for future successes. We have reported a few examples of these initialacquisitions in this paper. However, most of these are far in the past. A much better insight canbe obtained if we can track the initial acquisitions of an emerging acquisition programme inreal-time. When we started to write this paper, Oracle’s acquisition of PeopleSoft was promisingand turned out to be a key acquisition in what has turned into a very successful programme. Itmay be worthwhile studying Microsoft’s acquisition of Yahoo! as we move through the next fewyears.


AcknowledgementsI would like to thank Tom Sullivan (ex-CEO RPM), Conrad Hall (CEO Trader Publishing), MalMixon (CEO Invacare), Chuck Drombowski, Steve Benoit, Jay Bourgeoise, Dave Jemison, MarkSirower, as well as seminar participants at the Darden School, Case Weatherhead School of Man-agement, Wharton and Georgia State University. I gratefully acknowledge the support of the Dar-den School’s Batten Institute in funding this research.

Appendix

Research methodologyAt the core of this research are five companies. We have not only had numerous conversations (asopposed to one-off interviews) over the years with the management involved in the acquisitions butalso have been able to talk to some of the acquired companies; in two instances we have been able toobserve parts of the negotiation process. The management members are regular speakers in ourclasses and so we had the opportunity to see them respond to questions posed by students at busi-ness schools. Insight from one such Q&A is discussed in the text. One of our students was the en-trepreneur who was acquired by one of these serial acquirers. Our student gave us tremendousinsights into what drove the logic of the (failed in this instance) acquisition programme as wellas the negotiation process. We supplemented the core group of companies by analysis of strategiesreported in the business press, case studies (several developed by us) and inductive reasoning. Thecommon theme, however, is we have studied all of these companies in-depth, as opposed to beinga data point in the typical empirical study (including our own).

Could we have done some statistical analysis? Possibly. For example, we could have looked at therelative size of the acquired firms and we could possibly have found some central tendency. How-ever, the critical thing is not the absolute size but rather what the acquiring firm knows about theacquired firm. We do not believe this can be quantified. For example, many of these acquisitionswere targeted for years . The size of the acquired firm changed over the years but the clarity ofthe acquired company vis a vis the acquisition increased exponentially. The process by whichthis clarity was achieved is what we have tried to capture in this research. We have tried to docu-ment our impressions, to see parallels across acquisition programmes and have received feedbackfrom the serial acquirers (including three CEOs of these firms), as we were developing the concepts.Finally, an earlier version of this manuscript was reviewed by two CEOs of serial acquirers and therevised manuscript by the integration manager of a $10bn serial acquirer. The purpose of the reviewwas to see if our summary labels describing the processes correspond to what they know tacitly andif practising managers can relate to it.

Firms studied in this researchAll of these firms have had at least one acquisition per year over a five-year period. Most have beendoing this for decades. ABB, Nortel and Lucent are not aggressively acquiring at this time. FedExand Kellogg have made many acquisitions but they have all been one-off. We have used both thesefirms to make some points about integration because we are intimately familiar with some of theirbusinesses.

RPM, Trader, Invacare, National City, Lubrizol, Masco, Danaher, Newell, Eaton, Cisco, FedEx,Lucent, Nortel, Corning, Microsoft, AutoNation, Blockbuster, Nextel (now part of Sprint), KKR(and private equity firms such as Pzena Investment), Hanson, BancOne, Kellogg, Oracle, Ispat(now Arcelor Mittal), Wilber Ross (not a company), Illinois Tool Works, Cooper, ABB, UnitedTechnology, GE Capital, Parker Hannifin (no internal information was used at the request ofthe company), Oracle, Microsoft and Nestle.

References
1. C. Homburg and M. Bucerius, Is speed of integration really a success factor of mergers and acquisitions: an
analysis of the role of internal and external relatedness, Strategic Management Journal 27, 347e367 (2006).


2. The Boston Consulting Group research on this topic is described in: ‘‘Riding a Wave,’’ The Economist,April 8, 2006. Most practitioners expect experienced acquirers to be more successful. One of the mostcomprehensive studies by M. Lubatkin, 1982, op. cit., found no impact of experience on acquisitionperformance.

3. K. Schipper and R. Thompson, Evidence on the capitalized value of merger activity for acquiring firms,Journal of Financial Economics 11(1e4), 85 (1983); P. W. Slusser and R. Riggs, Realizing value througha planned acquisition programme, The Journal of Buyouts & Acquisitions 2(6), 3e9 (1984); K. Schipperand R. Thompson, Do Shareholders Benefit from Acquisition Programmes?, Mergers and Acquisitions18(2), 65 (1983); R J. Terry, Ten requirements for acquisition success, Planning Review 11(2), 24 (1983).

4. There is actually more variety in acquisition programmes since the 1980s (see Table 1) that could not becaptured by simply focusing on conglomerates. Although that model has also prevailed to the present date.

5. J. B. Kusewitt, An exploratory study of strategic acquisition factors relating to performance, Strategic Man-agement Journal 6(2), 151e169 (1985).

6. Kusewitt op. cit. and M. Lubatkin, A market model analysis of diversification and acquisition experience,Unpublished Doctoral Dissertation, University of Tennessee (1982).

7. See M. Sirower, The synergy trap, Free Press (1997), who reviews the literature on related merger and thefallacy of synergy in related mergers. More recently C. Homburg and M. Bucerius reached the same con-clusion (Homburg & Bucerius, (2006)).Consider two examples that have been used by Halebian andFinkelstein, 1999 and Hayward, 2002, op. cit., to demonstrate what is dissimilar across apparently similaracquisitions. Quaker Oats was very successful with Gatorade, but suffered a huge loss with the Snappleacquisition. A second example is Phillip Morris’s failed acquisition of 7-Up that Phillip Morris mistak-enly thought was similar to its prior successful acquisition of Miller. We agree with both studies thatthese acquisitions are not similar and the experiences are not transferable. However, now considerthe six-digit SIC codes: 312111dSoft Drink Mfg. (Pepsi, Gator Aid, Snapple) (Primary) 312120 (MillerBrewing) d Breweries (Primary) d Note that the four digits are the same. Using SIC codes you willtrack these acquisitions as similar in your empirical analysis! These acquisitions are also discussed laterin the text. In summary, these are great examples for not using SIC codes. To be fair to the studies usingSIC codes, many acquirers will say that they like to stay in similar businesses. What we determined isthat the similarity is not in the businesses but in their appreciation of acquisition as a line of business.

8. See M. L. A. Hayward, When do firms learn from their acquisition experience: evidence from 1990e1995,Strategic Management Journal 23, 21 (2002).

9. M. Hayward, op. cit.;; J. Haleblian and S. Finkelstein, The influence of organizational acquisition experi-ence, Administrative Science Quarterly 44, 29e56 (1999) Haleblian and Finkelstein (1999) and Hayward(2002) attempt to explain this lack of association by positing that only experience from ‘‘similar’’ acqui-sitions matter.

10. T. Laamanen and T. Keil, Performance of serial acquirers: toward an acquisition programme perspective,Strategic Management Journal 29, 663e672 (2008).

11. C. Homburg & M. Bucerius. 2006, op. cit. point this out in the context of speed of merger integration. It iswell known that acquisition performance is highly correlated with integration success; thus, internal sim-ilarity should be the focus of research on experience.

12. These similarities will vary from one acquisition programme to the other.13. This is similar to much of the organisational learning literature (see W. H. Starbuck. 2005 op. cit.).14. There is an academic theory behind this (see Capron, et al., 1998 op. cit.). They use the term ‘‘market fail-

ure.’’ What we observe is an informationally, inefficient market.15. Oracle has just concluded its acquisition programme that was aimed solely at overtaking SAP in enterprise

business applications. However, this programme started with a large acquisition and was bookended bymedium-large acquisition of Siebel. The AOL/Time Warner deal was not part of an acquisitionprogramme.

16. G. Yemen, S. Chatterjee and J. Bourgeoise, Cisco Systems: Early Not Elegant (A), Darden Graduate Schoolof Business Administration Case, (2004) UVA-BP-0446.

17. M. Porter, From Competitive advantage to Corporate strategy, Harvard Business Review, (1987) This isalso a very good paper that describes one kind of experience that works (restructuring acquisitions) vsthat does not work. Porter admits that the conglomerate model may have been appropriate in the1960s, when managerial talent was in short supply. This is possibly why RPM can use a similar strategyin the 1990s, where small entrepreneurial firms and conglomerates are very successful in developing econ-omies such as India (such as the Reliance Group).


18. S. Reed, The stealth oil giant, Business Week (January 3, 2008).19. P. Glader, In uncertain outlook: a test for world’s latest steel mogul, Wall Street Journal, (January 6 2005)

Invacare’s understanding of reimbursement issues also allows it to take risks that others would not con-sider. The fact that Invacare is also actively involved in helping shape reimbursement laws is an addedadvantage.

20. Academic research has looked at relative size mainly as a predictor to stock gains for the acquiring firms.In the early 1980s when the research in finance was still trying to promote acquisition as a value-increasingstrategy, the lack of acquiring firm gains was attributed to the small size of targets (i.e., the targets have tobe large enough before they contribute materially to the acquiring firm gains). Our findings suggest largesize of the acquired firm (relative to the acquiring firm) actually contributes to value destruction.

21. J. Bourgeoise, Trader Publishing and the UAP Acquisition, Darden Graduate School of Business Adminis-tration Case, (2004) UVA-BP-0438.

22. R. Sherefkin, ‘Roll-up’ suppliers are rolling downhill, Automotive News 80(6191), 4e41 (February 272006).

23. There are some firms in our sample that only relied on a few people at the headquarters to make the ac-quisition decisions. However, the key distinction between these firms and the conglomerate of old is thatthey simply did not look at financial metrics. They knew how the productivity of the firms can be im-proved. For example, Cooper Industries and Newell would directly change the factory and supply chainoperations immediately after the merger. Hanson and KKR were consummate restructurers.

24. G. Yemen et al. 2004, op. cit.25. Capron, et al. 1998, op. cit. suggests that market for resources is more likely to fail than market for busi-

nesses. This is probably true in large publicly traded companies. However, what we found with most ofour sample is that they also exploited market failures (more correctly, inefficiencies) in businesses, espe-cially with small private companies.

26. Consider Invacare, the Ohio-based market leader in wheelchairs. Invacare’s astounding growth since the early1980s has been based on acquisitions. It has one strict rule in selecting acquisitions: there are no HQ-drivendeals. Instead, all of Invacare’s general managers are on the lookout for product, geography and related acqui-sitions. According to CEO Mal Mixon, if a general manager does not agree, we do not the deal.

27. In some organisations there were incentives to refer potential targets. BancOne in the 1990s got many re-ferrals from acquired banks.

28. Parker Hannifin claimed this status in their 2005 Annual Report after 20-plus years of acquisitions.29. S. B. Sitkin, Learning through failure: the strategy of small losses, in L. L. Cummings and B. M. Staw

(eds.), Research in organizational behavior 14, 231e266 (1992) The term ‘‘intelligent failure’’ is quotedfrom p243. M. D. Cannon and A. C. Edmondson (2005), Failing to Learn and Learning to Fail (Intelli-gently): How Great Organizations Put Failure to Work to Innovate and Improve, Long Range Planning(2005), The firms in our sample did not necessarily suffer failures early on but they took small risks.The few failures that we noticed did not lead to the failure of the programme.

30. For example, see P. Porrini, Are investment bankers good for acquisition premiums?, Journal of BusinessResearch 59(1), 90 (2006); Datta makes the same point: see D. Datta, Organizational fit and acquisitionperformance: effects of post-acquisition integration, Strategic Management Journal 12, 281e297 (1991)Haspeslagh and Jemison point out that investment bankers rely on quantitative numbers which are easierto defend but do not capture all the nuances that make an acquisition successful. See P. Haspeslagh and D.B. Jemison, Managing acquisitions, The Free Press (1991).

31. One exception was Cooper Industries. Investment Bankers sought Cooper out with potential acquisitions.However, Cooper only used the information as a first cut and then did its own due diligence. Moreover,investment bankers began to seek out Cooper only after it had become an acquirer-of-choice. This is thebenefit of learning from small mistakes. There is a case to be made for integration consultation e espe-cially for one-off mergers or acquisitions (see the case of Kellogg’s acquisition of Worthington Foods laterin the paper).

32. Lou Gerstner makes the same point about the acquisitions that IBM did not make Louis V. Gerstner Jr.,Who Says Elephants Can’t Dance?, HarperCollins (2002).

33. This is easier for serial acquirers but even one-off acquisitions can benefit from a similar process. ConsiderMerck, which had initiated its own disease management programme prior to the acquisition of Medco.

34. L. Heller, 2007: Nestle pursues human nutrition through acquisition strategy (see http://www.foodnavi-gator-usa.com/news/printNewsBis.asp?id¼79351).

35. Available from: http://www.opensecrets.org/lobby/clientsum.php?lname¼Invacare+Corp&year¼2008.


http://www.foodnavigator-usa.com/news/printNewsBis.asp?id=79351



http://www.opensecrets.org/lobby/clientsum.php?lname=Invacare+Corp&year=2008



36. This issue has received some attention recently in the academic research. In particular, Capron, et al. 1998,op. cit have addressed this in the context of horizontal mergers.

37. Practitioners are now waking up to the dangers of synergy and why related synergistic mergers end upfailing more often. See S. Chatterjee, Why is synergy so difficult in mergers of related businesses?, Strategyand Leadership 35(2), (2007)

38. Sometimes the other acquirers that you are competing with can impact the premium. According to MalMixon, Invacare mainly competes with financial buyers such as private equity for its acquisition candi-dates. For all the reasons stated earlier, Invacare has a much better understanding of the true value ofthe candidate to Invacare than financial buyers.

39. This does not mean that a well publicised merger/acquisition cannot work. For example, we have alwaysmaintained that the Hewlett-Packard and Compaq merger has a good chance of success and Oracle’s hostilebid for PeopleSoft was a shrewd move. We address these mergers in a different paper: S. Chatterjee, The gainsto acquiring firms: the related principle re-visited, Academy of Management Proceedings (1987); J. B. Barney,Returns to bidding firms in mergers and acquisitions: reconsidering the related hypothesis, Strategic Man-agement Journal 9, 71e78 (1990) If the premium is too low then the target would probably not agree. Thusthe winner in a bidding match is typically the firm that has paid more than what the target feels is a fair price.

40. Financial theory suggests that debt/cash is preferable to equity swap d a result typically ascribed to asym-metric information about the target. However, Slovin, et al. finds the opposite to be true for intercorporateasset sales. The intercorporate asset sales are closer to the acquisition of small firms under the radar of publicscrutiny, than large public transaction studied by previous studies of cash vs. equity (see Solvin, et al. for a re-view). Slovin, et al. also find that acquirers benefit the most when only a small part (less than 20 per cent) oftheir total equity is expended for the purchase M. B. Slovin, M. E. Sushka and J. A. Polonchek, Methods ofpayment in asset sales: contracting with equity versus cash, Journal of Finance 60(5), 2385e2407 (2005).

41. Sometimes the market makes a similar judgment for one-off acquisitions. There is a widely shared impres-sion that AOL used its inflated stock price to buy Time Warner and possibly earned a new lease on life.

42. Bert, et al. give several examples of how acquiring firms manage the capital market expectations. This paysoff on subsequent merger or acquisition announcements A. Bert, T. MacDonald and T. Herd, Two mergerintegration imperatives: urgency and execution, Strategy and Leadership 31(3), 42e49 (2003) An earlierstudy had demonstrated that the capital market values acquisition programmes. See K. Schipper and R.Thompson, Evidence on the capitalized value of merger activity for acquiring firms, Journal of FinancialEconomics 11(1e4), 85 (1983); P. W. Slusser and R. Riggs, Realizing value through a planned acquisitionprogramme, The Journal of Buyouts & Acquisitions 2(6), 3e9 (1984); K. Schipper and R. Thompson, Doshareholders benefit from acquisition programmes?, Mergers and Acquisitions 18(2), 65 (1983); R. J. Terry,Ten requirements for acquisition success, Planning Review 11(2), 24 (1983).

43. A paper by Homburg and Bucerius op. cit. makes the observation that speed in integration is not alwaysgood. We find several instances where this is valid. They also provide a summary of the ambiguous find-ings of the ‘‘relatedness’’ hypothesis where relatedness is usually measured by SIC codes.

44. K. P. Scanlon, Impacts of relative size and industrial relatedness on returns to shareholders of acquiringfirms, Journal of Financial Research 12(2), 103e112 (1989).

45. This finding is consistent with most academic research. For example, see J. P. Walsh, Top manage-ment turnover following mergers and acquisitions, Strategic Management Journal 9, 173e183(1988); A. A. Cannella Jr. and D. C. Humbrick, Effects of executive departures on the performanceof acquired firms, Strategic Management Journal 14, 137e152 (1993).

46. This is the ‘‘external relatedness’’ that Homburg and Bucerius, 2006, op. cit. so astutely pointed out. It isvery easy to lose customers if the integration priorities are misplaced.

47. See Homburg and Bucerius 2006 op. cit.48. A. Bert, et. al., 2003, op. cit.49. P. Haspeslagh and D. B. Jemison, Managing Acquisitions, The Free Press (1991).50. One of the divisions of RPS was Roberts Express (now FedEx Custom Critical). FedEx has not integrated

FedEx Custom Critical until 2008 and probably never will.51. We may have to wait another 10 years before we can definitively say that the acquisitions made by Micro-

soft are failures. Microsoft has been very adept at integrating past technology investments into new ini-tiatives. For example, the Internet Protocol television that Verizon and AT&T are trying out has itsantecedents in the technology and people acquired in the WebTV Acquisition. Likewise, Hotmail is beingwidely used in Microsoft’s Windows Live initiative.

52. Heidi Moore, When Microsoft Buys, It’s Urgent, Wall Street Journal (2008).


53. J. Letzing, Microsoft’s Jaffe will step down, Wall Street Journal (January 10 2008).54. W. H. Starbuck and B. L. T. Hedberg, How organizations learn from success and failure, in M. Dierkes,

A. B. Antal, J. Child and I. Nonaka (eds.), Handbook of organizational learning and knowledge, OxfordUniversity Press, Oxford (2001).

55. Excerpt from Cisco Defies the odds with mergers that work, Wall Street Journal (March 1, 2000).

BiographySayan Chatterjee is Professor of Policy at the Weatherhead School of Management and a Batten Fellow of the

Darden School. He is currently studying business model innovation, competitive strategies and M&A with

a focus on merger integration. Prof. Chatterjee serves on the editorial board of the leading journals in

Strategy and has published numerous articles and books. He has consulted with many companies ranging

from Fortune 500 to start-ups. Area of Expertise: Competitive Strategy, Diversification Strategy, Innovation,

Mergers and Acquisition, Joint Ventures. [email protected]


mailto:[email protected]

The Keys to Successful Acquisition Programmes

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