Managers like to think of themselves as hard-boiled, fact-driven realists who (at least for internal consumption) tell it like it is. On the contrary, they are emotional, self-deluding dreamers who often part company with reality – and by a long distance. I’ve long treasured evidence of this uncomfortable truth – but even I was (slightly) surprised by a survey conducted by KPMG on the always thorny matter of mergers and acquisitions.
We’ve always known that managers bent on acquisitions tend to grossly exaggerate the benefits of deals, and that a hefty percentage of the latter duly fail to provide the expected joy. But there’s some excuse. You’re relying on information provided by other parties, which can often prove to be wide of the mark. Unforeseen difficulties, like personality and culture clashes, can cost you dear, Predictions of market performance may prove to be illusory – and so on.
What you can’t forgive, however, is erroneous measurement of performance AFTER the deal is completed, and you now have access to all the numbers and to all factors bearing on performance. So when KPMG found that 90% of company directors rated their acquisitions as successes, that seemed only right and proper – except that it was grossly untrue. The true success ratio was a mere 30%: that being the proportion of deals that had actually created value for shareholders. The 62% who thought their deals had worked were simply wrong.
Acccording to KPMG’s John Kelly, ‘the perception gap is wide’. This isn’t because the measure applied had any great subtlety or secrecy. KPMG simply measured share performance against the sector as a whole. I’m more interested in the underlying performance, for the share price only reflects the supply/demand relationship in the market. Kelly, though, seems a mite unclear on this key issue:
‘Rather than judging themselves against cost savings or market share’, reports The Times, ‘acquirers needed to analyse probable synergies more robustly and plan post-deal management in advance’. That sentence is plainly self-contradictory. Post-deal management and synergies will surely include cost savings and market share. They can’t, however, include share outperformance, which is not within management’s power to command.
Managers do, however, have the power to measure, manage and motivate. The first of these is fundamental. If you start from the belief that mediocre or worse performance is actually good, all other efforts are doomed. Turning acquisitions into high-earning assets is evidently a most challenging task. Managers can’t afford to cherish illusions about the size of the task and their success (or failure) in trying to climb the mountain.
