Financial analysts often cite a curious statistic: 70 percent of mergers, acquisitions and other business partnerships end in failure. This, for sure, is "curious" because management experts are also fond of noting that 70 percent of all strategic initiatives fall short of their intended goals.
Regardless, at the beginning of 2012, merger and acquisition activity was on the rise. According to a report from PwC, Asset Management M&A Insights, M&A values for the previous year were said to exceed a trillion dollars, a 15 percent increase over 2010. And forecasts for 2012 are optimistic: a study conducted by KPMG and The Wharton School of the University of Pennsylvania of 825 executives, entitled Executives Show Guarded Optimism about M&A in the Year Ahead, shows that nearly seven out of 10 companies planned to make at least one acquisition in 2012, up significantly from 2011.
In the first six months of 2012, the number of corporate M&A deals jumped to nearly 5,900, up from about 5,100 in the first six months of 2011, according to research firm Dealogic.
A year later, however, the dismally high rate of failure, coupled with a still-sputtering economy, has begun to weigh on corporate leaders, financial executives and boards of directors, alike. Analysis on Sept. 25, 2012, Ernst & Young M&A Tracker, shows, M&A activity has fallen to the lowest levels since the first quarter of 2010. Indeed, many business leaders are shifting their focus more on organic growth strategies--creating efficiencies, integrating business units, consolidating departments--and less on mergers and acquisitions.
In today's rapidly changing world, however, executives ignore mergers, acquisitions and other innovative partnerships strategies at their peril, removing sharp arrows from their strategic organizational quivers. Instead, companies and their financial leaders should not forego acquisitions, but should forego handling them so poorly.
The Case for Acquisitions
After significant study, the case for pursuing acquisitions is clear. Several years ago, the Boston Consulting Group examined organizations with sustained strategies of growth through acquisitions. Analyzing about 700 large U.S. public companies over a 10-year period, the study found that companies that focused on and made acquisitions achieved the highest shareholder returns, outperformed companies that solely focused on organic growth, created more value for shareholders and grew market share more quickly than their competitors.
An even stronger argument for acquisitions can be found by looking at companies like Cisco Systems Inc., which has for many years pursued a strategy of growth through acquisition.
Cisco has stayed relevant over an extended period of time. While 87 percent of its peers in the Fortune 500 have disappeared over the last 17 years, Cisco remains vibrant. In a recent interview with broadcast journalist Charlie Rose, the company's CEO John Chambers revealed...