Learning from Acquisitions at P&G

Acquisitions are risky with a higher failure rate of over 70%. A detailed analysis of all acquisitions at P&G from 1970 to 2000 showed that only 20% to 30% of acquisitions succeeded in that period. An acquisition was successful if that “met or exceeded the investment case and going-in investment objectives.” An acquisition was partially successful if that “exceeded the cost of capital.”

The study above found five fundamental root cause of failure:

1. The absence of a winning strategy for the combination
2. Not integrating quickly or well
3. Expecting synergies that don’t materialize
4. Cultures that aren’t compatible
5. Leadership that wouldn’t play together in the same sandbox

I have discussed above failure reasons in earlier post on Post-Merger Integration, quoting that post:

Buying a company is easy. Making that purchased company succeed in the post‐purchase environment is something else altogether. Just as anyone can get married, anyone can buy a company. But not everyone can make a marriage successful, and many companies wind up selling (divorcing themselves of) the very companies they initially enthusiastically acquired, often selling for a fraction of the original purchase price.

Further I discussed various topics Value Creation Strategies, Vision & Leadership etc in successive posts that outlines similar issues elsewhere and details aspects that should be kept in mind.

Coming back to P&G case, once above root causes were identified, the company worked on issues such as how should it organize each phase of acquisition, what processes should be in place, which interim measures would indicate whether the acquisition process is on track. So this is a disciplined approach with clearly identified  in-charge for each phase of the process.

These insights were used in the $57 billion USD acquisition of Gillette in 2005. The company identified all the value creation elements. It identified the integration the integration sequence and elements. It put a pretty senior manager in charge of every value creation initiative. It tracked progress for every value-creating initiative using a simple red (indicating not on track), yellow, green (indicating on track) process. It drove every phase of integration, every building block of value creation, to completion.

Above efforts resulted in delivering more than 150% of the originally estimated cost synergies. So the cost synergy alone created enough value to make the Gillette acquisition a success. The revenue synergies – such as in combining Crest and Oral-B brands and innovations in oral care products – all come on top of the cost synergies.

Source: Interview of A.G Lafley, Former CEO, P&G, HBR April 2011