Buyer Hubris and Value Destruction

by John Pancoast

Recently I sat down with the former head of a family owned manufacturing business to hear about his sale of the company to a PE-owned platform company pursuing a consolidation strategy. Being a thoughtful person, he was scratching his head about what he had experienced in the year since the sale. To be fair, he still holds a minor stake in the larger enterprise, but his advice has been roundly ignored by the CEO even as a new manager was brought in, sales are off 40%, pricing mistakes abound and nearly all the key managers have left for competitors.

This entrepreneur’s experience is extreme, but his general situation is not unusual. I am amazed how callous and arrogant buyers can be. Years ago, the head of a high-end home furnishings manufacturer related to me his regret at presiding over the acquisition of a mass market competitor, deciding that his company knew how to run the new subsidiary better than the existing managers. The struggling business was later sold. More recently, I worked with a technology company that was being sold. I will never forget the openly expressed determination of the buyer’s leadership team to “fix” the target, and the subsequent departure of most of their talented leaders and managers within the year. These are all specific, though less visible, cases of the Daimler approach to integrating Chrysler, where the “merger of equals” fell apart once Daimler’s true beliefs about Chrysler management became public.

As these situations demonstrate, value is destroyed when buyers believe that their success in dealmaking confers permission to do things their way in spite of differing value propositions, business models, customer needs, distribution channels or production processes. It occurs as well when acquisition models are based more on financial engineering benefits than on building comparative advantage.

There is an alternative to these value-destroying approaches. Consider treating the acquired organization the way you would treat a new hire of whom you expect much in her first year on the job. As with any successful new partnership, begin by establishing rapport. Listen to and trust the leaders of the organization you are buying to have knowledge that you cannot have discovered in due diligence. Seek genuinely to learn what they know about their business and why it has been successful. Find the common ground in your visions of the future while seeking to understand more deeply the factors that drive the differences in that vision. Find a way to discuss the issues and challenges the leaders have faced in the past, and their struggles to address them. Finally, work together to build a roadmap for the combined business.