The Acquisition Peril Essay

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The Acquisition Peril, Part I-Why Is Postmerger Integration So Difficult?
Don Shay and Sandra Burnis*



cquisitions in the government services industry con-



tinue unabated, according to
Houlihan Lokey Howard &


Zukin. The McLean investment banking firm reported in Febru-

For many government services firms, acquisitions figure prominently in the strategic growth plan. This is especially true of midsize firms feeling the squeeze-too small to be a prime contractor, yet bridling at a subcontractor role. For others, access to cleared workers defense/intelligence customers is a key driver of acquisitions. Regardless of the strategic merits, studies consistently find that
60-70percent of deals actually diminish shareholder value. The
Insiderasked Don Shay and Sandra
Bumis, experts in merger integration, to identify why the postmerger part of most deals is trying and ojienfaits.
Part II. in October, will look at how to stay out of trouble.

ary 2004, "In the past 12 months, technology and defense contractors have completed

nearly 200 acquisitions, more than all the deals in 1998 and


Is Costly), Deals

typically don't go bad because of

company. Within two months after the deal's announcement, 29 of the top 30 TNS managers had

flawed strategy. They fail because

1999 combined."
While acquisitions continue to be a key element in many government Deals Are Disruptive

services firms'

growth strategies, this practice is not without peril. Consider, for

departed, causing substantial tur-

deal economics demand higher

moil. PSInet's woes continued as

returns from the combined entity

their acquisition of Metamore led

at the same time that a set of

to their bankruptcy a year later.

disruptive events and changes,

Most companies recognize

both real and perceived, is im-

that effective communications are

posed on both companies. Once a

critical to capping this uncertainty.

example, a study by noted M&A expert Mark Sirower. He found that "2/3 of 168 deals surveyed experienced significant value destruction." Reported M&A-

related hiccups in firms such as

As [customers] wonder about service deterioration, changes in sales relationships, loss of influence, and. changes in pricing, they become more vulnerable
[and] competition ... will turn up the heat.

CACI, Titan, and ManTech sug-

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gest a level of acquisition indigestion not inconsistent


this finding.
The source of these difficulties may be multiple and compound, such as inadequate due diligence, unexpected changes in the marketplace, and underestimation of the difficulties of integration. The financial outcomes are often revenue shortfalls, higher than expected integration costs, and shrinking margins.
What is it about acquisitions that makes them so tough to pull off? What problems do companies typically face when they embark on a "growth by acquisition" strategy? And what are the implications for government services firms?

deal is announced, most compa-

However, their communications

nies tell employees and customers

tend to promote the strategic and

it's business as usual. The reality is

financial benefits of the deal with-

far different. Employees of both

out directly addressing the issues

companies recognize that change

of most concern to employees,

is inevitable, and absent concrete

customers, and others.

information from management,

Consider Dyncorp's acquisi-

rumors abound. Distraction is

tion by CSC, as described by Mike

inevitable too. As a result, pro-

DeBruhl, then Dyncorp's senior

ductivity suffers as employees

vice president of