Acqusition

Are You Paying Too Much for That Acquisition?

July 1999

by Robert G. Eccles, Kersten L. Lanes, and Thomas C. Wilson

Robert G. Eccles is president of Advisory Capital Partners, a private investment and advisory firm in Jupiter, Florida.

Kersten L. Lanes is a partner at PricewaterhouseCoopers in New York City; she specializes in strategic change in mergers and acquisitions.

Thomas C. Wilson is a partner and head of the Centre of Excellence for Strategic M&A at PricewaterhouseCoopers in London.

Despite 30 years of evidence demonstrating that most acquisitions don’t create value for the acquiring company’s shareholders, executives continue to make more deals, and bigger deals, every year. Recent research shows that acquisitions in the 1990s have just as poor a record as they did in the 1970s. There are plenty of reasons for this poor performance: irrational exuberance about the strategic importance of the deal, enthusiasm built up during the excitement of negotiations, and weak integration skills, to name a few. Many failures occur, though, simply because the acquiring company paid too much for the acquisition. It wasn’t a good deal on the day it was made—and it never will be. A good example is Quaker Oats’ acquisition of Snapple. Some industry analysts estimated that the $1.7 billion purchase price was as much as $1 billion too much. The stock price of both companies declined the day the deal was announced. Problems with implementation and a downturn in the market for New Age drinks quickly led to performance problems. Just 28 months later, Quaker sold Snapple to Triarc Companies for less than 20% of what it had paid. Quaker Oats’ and Triarc’s stock prices went up the day that deal was announced.

How should you think about what to pay for an acquisition? And how should you know when to walk away? In the course of a research project on mergers and acquisitions, we explored those questions with 75 senior executives from 40 companies. All were experienced,...