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How successful are most business acquisitions?

Question

I heard that most acquisitions fail. Is this true? Are most business acquisitions a failure?


 

Answer

Yes, this is absolutely true. Most acquisitions fail.

Data is scarce on the success rate of acquisitions — approximately 70% to 90% of acquisitions fail to meet expectations. Most acquisitions destroy value for the acquirer.

But this is missing the point.

The real question is not about the “success rate.” The question is about the alternatives.

What are the alternatives to business acquisitions? How does growth by acquisition compare to these alternatives?

The alternative to growth by acquisition is internal or organic growth. What is the failure rate of organic growth? For example, what percentage of Google’s new products reach at least a breakeven point? Or for another example, what percentage of a pharmaceutical company’s products under R&D ultimately become successful? On a broad scale, these answers may be impossible to calculate, but it is likely in a similar success range to a business’s acquisitions. Obviously, this varies significantly based on the industry and the type of organic growth the company is trying to achieve. Retailers adding new products to their lines will experience a higher success rate than tech companies launching a new service that’s unrelated to their other products.

You cannot consider the success rate of acquisitions in a vacuum. Rather, you must do so within the context of alternative strategies. Acquisitions are one of many tools in corporate development.

Here are some of the most common alternatives to acquisitions:

  • Internal growth such as opening new locations or organizational restructuring
  • Outsourcing and brand labeling
  • Internal research & development (R&D), contract R&D, or licensing
  • Strategic alliances and joint ventures with industry partners
  • Financing and investment growth

In declining industries, any form of organic growth has a high failure rate, so in flat or declining industries, inorganic growth (i.e., acquisitions) may be the only remaining practical option.

Additionally, you must consider the objectives for an acquisition to determine if the acquisition was successful. How you define “success” is critical to determining if the acquisition met its objectives.

Some of the most common goals of a business acquisition include:

  • Reduce expenses
  • Expand the customer base
  • Prevent competition
  • Improve speed to market
  • Increase market share
  • Increase revenue growth
  • Enter new markets or geographies
  • Acquire new technology, products, or services
  • Acquire talent
  • Block competition
  • Acquire purchasing advantages
  • Obtain key contracts
  • Create barriers to entry

Yes, business acquisitions are unsuccessful the majority of the time but acquisitions will remain a viable business growth strategy for a long time. And the faster the pace of change, the more acquisitions will play a role in a company’s overall corporate development strategies.

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