Profitable Growth by Acquisition 567A 1996 survey of 150 companies by the Economist Intelligence Unit in London
found that 70% of all acquisitions failed to meet the expectations of the initia-
tor. Coopers and Lybrand studied the postmerger performance of 125 com-
panies and reported that 66% were financially unsuccessful.
We now turn our attention to several specific M&A transactions. While
unscientific, this approach is more informative and certainly more interesting
than reviewing academic research. We purposely focus on failed deals in an at-
tempt to learn where the acquirers went wrong. In the next section, we exam-
ine the acquisition strategy and policies of Cisco Systems, the acquirer ranked
No. 1 in a recent survey of corporate M&A practices.
As you read about these dismal transactions, can you speculate on the rea-
sons for failure? On their faces, they seemed like strategically sound transac-
tions. While one might question AT&T’s push into personal computers, the
other two deals were simple horizontal mergers, that is, an extension of the ex-
isting business into new product lines or geographic markets. In hindsight,
each deal failed for different reasons, but there are some common issues. The
lessons learned are critical for all managers considering growth by acquisition.
We now examine these colossal failures in more detail.
Analysts believe that the merger between AT&T and NCR failed due to
managerial hubris, overpayment, and a poor understanding of NCR’s products
and markets. A clash between the two firms’ cultures proved to be the final
nail in the coffin. In 1990 AT&T’s research division, Bell Labs, was one of the
worlds premier laboratories. With seven Nobel prizes and countless patents to
its name, it was where the transistor and the UNIX operating system had been
invented. AT&T’s executives mistakenly believed that this research prowess
Disaster Deal No. 1Between 1985 and 1990, AT&T’s computer operations lost approximately $2
billion. The huge conglomerate seemed unable to compete effectively against
the likes of Compaq, Hewlett Packard and Sun Microsystems. They decided to
buy rather than build and settled on NCR, a profitable, Ohio-based personal
computer (PC) manufacturer with 1990 revenues of $6 billion. NCR did not
want to be purchased and this was made clear in a letter from CEO Chuck
Exley to AT&T CEO Robert Allen: “ We simply will not place in jeopardy the
important values we are creating at NCR in order to bail out AT&T’s failed
strategy.” OUCH! However, after a bitter takeover fight—and an increase of
$1.4 billion in the offer price (raising the premium paid to more than
100%!)—AT&T acquired NCR in September 1991 for $7.5 billion.
Af termath:In 1996, after operating losses exceeding $2 billion and a $2.4 bil-
lion write-off, AT&T spun-off NCR in a transaction valued at about $4 billion,
approximately half of what it had paid to acquire NCR less than five years
before.