When growth companies change hands, both buyers and sellers are in for a surprise
For many growth-company owners, finding an acquirer is the ultimate dream. How better to cash out? Few companies ever go public (only 5% of all corporations are publicly-held). and not many growing business are logical candidates for transfer to the next generation under terms that include a cash buyout of mom or dad. So getting someone to purchase all or most of your company is the easiest way to harvest what those years of hard work have sown. Especially if you want to stay on after selling out, happy for the cash in the bank but eager for the chance to run your company with resources you never had before.
Unfortunately, few company heads look beyond the actual acquisition and think about what will happen to their businesses after they've been acquired. And from what we can see, relatively few acquirers look much beyond the acquisition decision either.
So we decided to do exactly that. For those thinking of shopping their companies and, too, those thinking of buying, our findings will provide a peek into the room on the other side of the acquisition door. We looked into our Cognetics database at two different periods of time: once in the 1970s and once in the 1980s. In the process, we studied 10,500 acquired companies and contrasted their experiences with those of 1.4 million comparable companies that were not acquired. The results for both periods are virtually identical, so we'll focus on the more recent one, in the 1980s.
From the start, we had a premise: the wave of mergers and acquisitions sweeping the country must be based on benefits that a large company can bring to a smaller one. The larger company would have the resources -- capital, marketing expertise, and so on -- needed to leverage the bright idea embodied in the smaller one, and to keep the smaller one afloat in hard times. Following this basic logic, we might expect a real surge of growth in the smaller businesses after acquisition -- a surge that would carry them beyond the still-struggling, resource-starved companies that never get acquired.
Since growth is the issue, we divided companies into groups based on their growth from 1981 to 1983, then we compared the performance of those that were acquired at the end of 1983 with the performance of those that weren't.
So much for theory. The acquiring companies may have thought they were buying growth that they could accelerate, but in fact what they bought was a huge and sudden slowdown (see figure 1). The average rapidly growing acquired company was growing at a compound rate of 30.4% per year from 1981 to '83. By 1983 to '85, it's growth had slipped to less than one-fifteenth of that level (1.6%). Fast-growing businesses that stayed on their own also slowed down a great deal (a phenomenon to which we'll turn in next month's column), but they did a better job, not worse, of somehow countering the letdown than their acquired counterparts did.
GROWTH OF ACQUIRED AND NONACQUIRED COMPANIES, 1981-85
Company Groups by Average Annual Growth Rate Average Annual Growth Rate
Total Two-Year Growth of Acquired Companies of Nonacquired Companies
1981-83 81-83 83-85 change 81-83 83-85 change
More than 15% 30.4% 1.6% -28.8% 29.8% 2.6% -27.2
10-15% 5.9 1.8 -4.1 6.1 1.5 -4.6
5-10% 3.6 -1.0 -4.6 3.7 1.4 -2.3
0-5% 1.4 2.3 0.9 1.5 0.9 -0.5
Decline -18.0 4.1 22.0 -17.3 4.8 22.1
Growth not for sale: what happens to companies that get bought, As their acquirers have learned, fast-growing firms usually don't keep growing fast.
Those few buyers that acquired declining businesses with the hope of turning them around succeeded admirably, but did no better at the turnaround game than the businesses left to their own devices. In fact, nonacquired declining companies were declining slightly less in 1981 to '83 than acquired decliners, and were able to convert decline into growth slightly better.
Well, the argument might go, maintaining growth is a tough game any way you play it. At least the acquired businesses will be better protected from failure with all the acquiring company's resources behind them. Wrong again. Acquired companies are much more likely to be liquidated than those that toughed it out on their own, regardless of how well either group was doing in the previous two years (see figure 2).
FIGURE 2, FAILURE RATES OF ACQUIRED AND NONACQUIRED COMPANIES, 1981-85
Company Groups by Acquired Companies Nonacquired Companies
Total Two-Year Growth That Closed That Closed
1981-83 83-85 83-85
More than 15% 11.2% 8.1%
10-15% 9.6 5.3
5-10% 5.3 5.0
0-5% 6.7 4.5
Decline 14.6 11.4
Acquired companies are more likely to be liquidated. Deep pockets haven't kept growth companies afloat.
As I mentioned earlier, there is nothing new, or unique to the 1980s, about these patterns. Nearly the same results show up among the 1969 to '76 data.
There are some lessons in all this. The young, growing company dreaming of acquisition as a logical tactic in its campaign of conquest should prepare for a letdown. You can't expect your baby to be the same in the hands of different parents. In general, your baby's growth is likely to be severely stunted. There's even a good chance the baby will be thrown out with the bathwater. So make sure you get a good price when you sell, because it might be the last satisfaction you get.
If you are in the business of acquiring businesses, don't count on being able to buy growth and innovation. Statistically, at least, buying it appears to kill it.
There are many logical arguments about how added resources and logical fit with a new parent will send a smaller company spiraling to new heights. But the arguments in most cases turn out to be wishful thinking, not sound theory. The logic is overridden by the loss of the original spirit and drive that made the company grow in the first place. You must think long and hard about how to retain and nurture the innovative spirit of the acquired company rather than to squash it with "professional management" or big-company procedures. It can, and has, been done -- but not by accident, and not very often.
From a broader perspective, it might seem that all of the above adds up to an overwhelming indictment of mergers and acquisitions. Not at all. Remember that the number of acquired companies, and the jobs associated with them, are almost insignificant (less than one-tenth of 1% per year). For every company that is acquired, there are literally thousands that dream about it. It's what got many of them started, and it's what keeps most of them going.
Acquisition is a pot of gold at the end of the rainbow, and for many it's the only pot. To remove the pot because some of the gold is a little tarnished would be a huge mistake. It would remove the main incentive that drives the majority of growing innovative companies in the United States. Also, what happens to acquired companies isn't that much worse than what nonacquired companies manage to do to themselves.
A more useful conclusion is that companies should be realistic about what can be achieved through acquisition, and that both parties to a transaction should think carefully about how to make the union work. It's usually a marriage of clashing cultures. And it requires more than the usual amount of sensitivity and effort if it is to succeed.