The Wall Street Journal is reporting today that the flow of mega-mergers – deals over $1 billion – is at its lowest level in four years. In board rooms across the country CEOs are shedding their bravado and doing smaller deals and bolt-ons and other things that can be more easily brought into the fold. Risk is out.
But what really makes an acquisition risky? Seems to me that from a practical perspective deals have two kinds of risk:
- Investment risk → Assuming all goes according to plan, am I paying the right amount of money for this company?
- Execution risk → Having paid the right amount, am I responding in a way that will enable me to achieve the intended objectives (and thus the returns)?
It is axiomatic that by reducing the amount of capital put at risk one reduces the overall investment risk. (Even The Merger Verger can figure that out.) But I can also figure out that smaller deal size generally means smaller upside potential.
So to push closer to the desired levels of aggregate return, companies are doing more deals, that is, a bigger number of smaller deals. Which can create additional execution complexity, which can lead to execution inefficiencies and dropped balls, which can lead to reduced returns, which, which, which. Which is it?
In no way do I dismiss the appropriateness of cautious deal making in what is still very much the “post-meltdown” era. I just want to raise the flag that, while doing a pile of smaller deals will reduce the investment risk of each, in the aggregate it may actually increase the execution risk of them all.
Maybe in this new environment an important due diligence question faces inward:
“Do WE have the resources to make this deal work?”
Because if you don’t, the solution isn’t to pay less. The solution is to walk away.
— ◊ —
The Journal article may be found here: For Now, It’s Deal Making Lite (it may require registration and/or subscription)