Deals from Hell

16

Memo to the CEO: A Coda on Growth

Dear CEO: The research and cases give some direction about what you and your organization should do to avoid failure in M&A. To these I would add one last message. It concerns one of the underpinnings of M&A activity of which you are the chief architect, your choice of the annual growth goals of the firm.

Growth targets drive M&A activity.Two sources fulfill a growth target for the earnings of the firm: organic growth (such as inflation, real expansion of the economy, market share gains, and productivity gains) and inorganic growth (M&A, joint ventures, etc.). At most mature firms, organic growth is a relatively modest number and not something you can increase very easily.This means that M&A has to fill the gap between the target you have set and the modest organic growth rate your core business can realize. The result is that your business development staff is given a shopping mandate each year to produce so many more cents in earnings per share.

This is a dubious approach to M&A. It focuses the attention of your organization on earnings cosmetics rather than on creating value. Reported earnings per share is a backward-looking, one-period measure when so much of what your firm does in the current year has impact years into the future. It ignores the deployment of capital necessary to produce an EPS increase. It ignores a host of assets that matter to investors (such as brand names, patents, and creative capital) and invites gaming behavior ...