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Related Experiment Videos

M&A needn't be a loser's game.

Larry Selden1, Geoffrey Colvin

  • 1Columbia University's Graduate School of Business, New York, USA.

Harvard Business Review
|June 13, 2003
PubMed
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Most mergers and acquisitions (M&A) fail, destroying shareholder value. Focusing on customer profitability, not just profits, is key to successful M&A and creating wealth.

Area of Science:

  • Business Strategy
  • Corporate Finance
  • Customer Relationship Management

Background:

  • A significant majority of mergers and acquisitions (M&A) fail to create shareholder value.
  • Acquisition failures often stem from overlooking balance sheet impacts and focusing solely on income statement metrics.
  • This leads to a decline in the company's true profitability, measured by return on invested capital.

Purpose of the Study:

  • To investigate why most acquisitions fail to generate shareholder value.
  • To propose a framework for evaluating M&A deals by focusing on customer profitability.
  • To demonstrate how understanding customer economics can lead to successful acquisitions.

Main Methods:

  • Analysis of financial statements, focusing on the balance sheet and return on invested capital.

Related Experiment Videos

  • Examination of customer profitability metrics and their variation across customer segments.
  • Developing methods to measure and analyze customer profitability.

    • Main Results:

    • Customer profitability varies significantly, with some customers being highly profitable and others representing net losses.
    • A deep understanding of customer economics is crucial for evaluating acquisition targets.
    • Ignoring customer profitability in M&A analysis is a primary driver of value destruction.

    Conclusions:

    • Acquisitions should prioritize customer profitability analysis to ensure shareholder value creation.
    • By understanding customer economics, companies can identify wealth-creating deals and salvage underperforming ones.
    • Shifting focus from short-term profits to long-term customer value is essential for M&A success.