Leadership in Mergers and Acquisitions: Lessons from Buffett

 

  • In 1968 New York Central and Pennsylvania Railroad merge to form Penn Central, sixth largest corporation in the United States. Two years later, Penn Central files for bankruptcy protection, the largest corporate bankruptcy.
  • In 2001 JDS Uniphase writes down $38.7 billion related to companies purchased over prior two years.
  • In 2002 QWEST Communications takes a $30 billion write off related to U.S. West acquisition.
  • In 2008 Sprint wrote off $30 billion related to Sprint – Nextel merger in 2005.
  • In 2012 HP writes down over $18 billion of which $8.8 billion was for Autonomy acquisition; $8 billion for EDS. See Chart below of its recent relative stock performance.
  • But if there is a race to the bottom, then it is hard to beat AOL Time Warner’s $99.5 billion write down in 2002, the largest ever in corporate history,  mostly related to the AOL value.
               
  HP Stock Performance – Growth of $100: 10/07 – 10/12
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    10/07 10/08 10/09 10/10 10/11 10/12
  HP        100.00         74.57         93.31         83.23         53.35         28.41
  S&P 500        100.00         63.90         70.17         81.76         88.37        101.81
  S&P Info Tech        100.00         58.79         77.31         91.41         99.43        110.08
               

(Source of data: HP 2012 Annual Report)

These are just a few examples of CEOs of acquiring corporations decimating shareholder values, disrupting lives, shattering hopes and dreams of their workforce. Regrettably, some top corporate leaders and their boards remain unaccountable for their perceived malfeasance. It is well understood that most mergers and acquisitions do not pan out for a variety of reasons. Harvard’s Clayton Christensen et al. note between 70% and 90% failure rate of mergers and acquisitions. But despite a dismal success rate of mergers and acquisitions, businesses spend over $2 trillion annually to chase the mirage of potential benefits from synergy of M&A activities which never materialize. M&A Deal volume in 2012 is estimated at $2.36 trillion. High M&A failure rate is a lesson for the leaders and stockholders of the acquired businesses: negotiate cash deals to the extent possible and in most cases do not believe in the hype of achieving further value appreciation of their investment from synergetic gains documented in glossy spreadsheets and charts.

In order to be fair to the CEOs, however, failure of some well thought out strategic M&A decisions is beyond their control. Unanticipated headwind and exogenous factors (e.g., post-1999 NASDAQ meltdown and its effects on AOL value) played part in some faltering mergers and acquisitions.

Can outcome of M&A be improved. The answer is the incredibly talented investor, leader, and manager, Warren Buffett. His acquisitions have a remarkably high success rate and he hardly ever loses CEOs of the acquired businesses to the competition. Miles (2002) in his book, The Warrant Buffett CEO: Secrets from the Berkshire Hathaway Managers along with a forward from Nebraska Congressman and former football head coach, Tom Osborne, outline Buffett’s simple, consistent approach to acquisitions:

  • People vs. Business. Buffett buys people first, business second. He looks for CEOs of potential target businesses for character and trust. Character and CEOs who are outstanding human beings count most in his assessment. Unlike Buffett, others analyze business first and overlook the character of the leaders of the acquired businesses.
  • After acquisition, he gives the CEOs of acquired businesses full autonomy; trusts them and remains loyal to them; in turn they remain loyal to Buffett. He does not wish his CEOs to retire; just like him, he wants them to continue working forever.

Buffett’s genius is in simplicity and consistency of approach to acquisitions: first assess the character of the top leader of business being acquired; once acquired, retain the top talent forever, trust them and be loyal to them; acquire only those businesses one understands. His acquisitions succeed; of others mostly falter. It is all about leadership.