Missed Expectations and the 80% Acquisition Rule

Eighty percent of all businesses purchased by another company or by a new investor-operator fail to meet the stated expectations of the buyer after one year.

As with the fifty percent rule discussed last week (fifty percent of startups fail within two years), this rule is hard to find an author willing to be quoted as the source. But it is within the range of experience by many of us professional investors, and with those who have acted as brokers, serial purchasers or consultants for acquisitions.

Why would anyone acquire a company?

With this rate of disappointment, why would anyone or any company purchase another? The answer is that the most sophisticated buyers have experience in integrating an acquisition successfully into an enterprise and those successes are the most visible models for others to follow. I worked with one two years ago that was exemplary in its ability to understand and integrate our selling business into its significant number of subsidiaries, and quickly create uniform dashboards and supply integration talent.

How about those less-experienced buyers?

As we move down the chain of experienced buyers, the problems of underestimation of capital, customers who drifted away from the acquired company, key employees who found the new enterprise a culture too different to endure and left, and other difficult-to-plan-for events overwhelm the majority of acquired companies, resulting in less revenue, less profit, and far less growth than forecast during the buyer’s due diligence.

Lessons to learn from the best

There are great lessons to learn from Cisco and other companies that have grown wonderfully by acquisition, understanding the need to maintain elements of the acquired company’s culture, while offering the employees retained new and attractive reasons to stay and build the combined enterprise.

And the lesson?

So, this insight is simple. Study the literature about companies that have succeeded in their acquisitions, finding how and why such successes rose to the top twenty percent of all acquisitions when measured by the acquiring company CEO satisfaction ratings after a year. Emulate those actions that are appropriate. Plan for surprises by keeping enough capital available to restart or re-align the acquired company after an initial problem period.

Over all, know the eighty percent rule and act carefully to protect both the acquirer and the entity acquired against failed expectations.