Joe’s Journal: A Tale of Two Acquisitions

“An acquisition will succeed only if the acquiring company thinks through what it can contribute to the business it is buying, not what the acquired company will contribute to the acquirer, no matter how attractive the expected ‘synergy’ may look. What the acquiring company contributes may vary. It may be management, technology or strength in distribution. This contribution has to be something besides money. Money by itself is never enough.”

— Peter F. Drucker

General Electric had a small share of the market for air-conditioning, and its AC unit was only marginally profitable. One of GE’s problems was that it had to rely on outside contractors to install and service its units, but customer complaints came back to GE.  This frustrated people inside GE, whose overall quality reputation is influenced by defects in any of its products. Trane, on the other hand, had a dominant position in the air-conditioning market; air-conditioning is its main focus. So, the acquisition by Trane of GE’s air-conditioning unit in 1982 created a win-win situation. Trane, a part of Ingersoll Rand,  could provide better installation and service, thus alleviating customer complaints. GE’s AC employees were thrilled to be a part of a company that was wholly dedicated to air-conditioning. And GE invested proceeds from the sale into businesses in which it was dominant. This is an example of an acquisition that followed Peter Drucker’s advice and was successful. [EXPAND More]

At the same time, there are notable examples of acquisitions that have failed by following the same advice. For example, Daimler-Benz purchased Chrysler for $37 billion in 1998.  When Daimler purchased Chrysler it thought it could bring a missing ingredient to Chrysler: global distribution capacity. This acquisition failed, however, and Daimler sold 80 percent of its equity for next to nothing. Why did the acquisition fail while following Drucker’s playbook? A number of reasons have been offered: excess production capacity around the world, Chrysler’s cost structure and rising fuel costs. Daimler’s tremendous strengths, including world-class engineering and distribution, could not overcome these limitations.

So, what should we conclude? Is Drucker’s advice correct? The answer is yes—but there are many other factors to consider as illustrated in the Daimler example. The acquisition by Trane worked because it acquired an AC unit that was profitable and could easily be integrated within its product line and made even more effective. In other words, the integration was straightforward to implement. Not so in the case of Daimler. Remember: Drucker’s advice is very useful, but acquisitions are inherently risky and even the best advice sometimes fails.

— Joe Maciariello [/EXPAND]