When it comes to merging companies, many CEOs find themselves in a classic Catch-22: 70% of major acquisitions fail, yet it’s almost impossible to build a world-class company through organic growth alone, say David Harding and Sam Rovit in their book Mastering the Merger: Four Critical Decisions that Make or Break the Deal. Here they describe how some companies will do anything to make themselves look good for a sale.
- Stuffing distribution channels to inflate sales projections. Example: A company may treat many of the products it sells to distributors as sales, which may not represent recurring sales.
- Using overly optimistic projections to inflate the expected returns on capital expenditures. Example: A company might assume that a major upswing in its cross selling will enable it to recoup its large investment in customer-relationship management software.
- Disguising the head count of cost centres by decentralizing functions. Example: Some companies scatter the marketing function among field offices and maintain just a co-ordinating crew at headquarters, which hides the true overhead.
- Treating recurring items as extraordinary costs. Example: A company might use the restructuring of a sales network as a way to declare bad receivables as a one-time expense.
- Underfunding capital expenditures, marketing and administration. Example: In many manufacturing industries, postponing machine renewal by a year or two will not impact business immediately, but will buttress the balance sheet.
- Encouraging the sales forces to increase sales while hiding costs. Example: A company looking for a buyer might offer advantageous terms and conditions on post-sale service to boost current sales.