Secrets of the Deal

The force behind a successful acquisition is often inscrutable.
George DonnellyOctober 1, 1999

The force behind a successful acquisition often is inscrutable. Was the acquired company a bargain? Did the acquirer buy withinits industry? Was the deal closed in good time? The secret rests in none of the above, according to a new study by consulting firm Booz, Allen & Hamilton Inc. Instead, successful acquisitions hinge on the quality of the process, and not necessarily on the premium a company pays to complete a deal.

In fact, Booz, Allen found no correlation between the purchase premium of an acquisition and the ultimate benefit of a deal to a company, as measured by how much shareholder value the deal helped to create, relative to peers. “The real objective measure is how much value you can create in the long run, as opposed to how much you have to pay to get in the game in the first place,” says Amy Asin, a principal in Booz, Allen’s Organization and Strategic Leadership practice. She adds: The study is “not a message that says pay a lot.”

In examining 117 deals that occurred between 1994 and 1996, the study looked at the impact of acquisitions two years down the road. Among the top deals: Williams Cos.’s acquisition of Transco Energy Co. In the case of Williams, Booz, Allen calculates that the energy and networking company paid a $2 billion premium for Transco, a gas pipeline company, but it subsequently has generated more than $4.8 billion in shareholder value. The market originally punished Williams after the acquisition, but the company knew that Transco had recently ended a guaranteed investment contract that had depressed its stock price.

What drives successful deals are three components of the acquisition process: vision, or knowing how the acquisition fills a need in the company; architecture, which includes detailed postmerger planning before the deal is completed; and leadership, from both the acquired and acquiring firms. Asin says compelling vision won’t do it alone. In some cases, she says, “They have the vision, but they don’t have the resources to get it done, in terms of the people and the architecture.”