What Makes A Great Acquisition?

What Makes a Great Acquisition?
| The Generalist 15/11/2024, 12:00 am
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What Makes
a Great
Acquisition?
The common wisdom is that most
M&A goes south, with reported
failure rates of up to 90%. How can
CEOs tip the scales in their favor?
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ACTIONABLE INSIGHTS
If you only have a few minutes

to spare, here’s what investors,
operators, and founders
should know about what
makes a great acquisition.
Advantage, extroverts.
Confident, outspoken chief

executives tend to produce
better acquisition outcomes
than understated
counterparts, according to
one research study. The
authors suggest that this
performance bump stems
from sociable CEOs’
broader networks and
superior power of
persuasion. Their abundant
relationships deliver more
M&A opportunities, while
their gift of the gab can
make even a mundane
acquisition sound
compelling.
Culture wars. Can an

authoritarian incumbent
effectively integrate a non-
hierarchical startup? Can a
fast-moving tech company
successfully absorb an old-
school shop that moves at
the pace of the civil
service? It will not surprise
you that such marriages
often end unhappily. Per
one Academy of
Management paper, the
“congruence” of cultures is
critical to an acquisition’s
success. Matchmaking
between firms requires
more than merely
complementary businesses.
Need for speed. M&A

tends to happen in distinct
waves. Between 1890 and
1990, for example, 50% of

all acquisitions in the
United States occurred
during four discrete
periods. Depending on
when in one of these cycles
a company partakes in an
acquisition, returns can
vary significantly.
Enterprises that act early
tend to have better results,
benefiting from lower
prices and greater
selection, while laggards
are often left overpaying
for slim pickings.
Practice, practice,
practice. As the old joke
goes, How do you get to
Carnegie Hall? The answer:
Practice, practice, practice.
The road to the Fortune
500 follows a similar route.
Research shows that
companies that complete
more acquisitions tend to
become better at them. Not
only do these businesses
hone their processes, but
they effectively average the
price of their purchases –
buying in both bull and
bear markets.
Let’s begin with a true story. We can

call it A Tale of Two Acquisitions.
It was the best of times, it was the

worst of times. It was the year of the
Eurozone crisis, it was the year of the

Queen’s Diamond Jubilee, it was the
epoch of Obama, it was the epoch of
Putin, it was the season of Curiosity,
it was the season of ignorance, it was
the spring of Joseph Kony, it was the
winter of Hurricane Sandy. In short,
it was 2012 – a year of broad and
roiling change, a year that included
one of the most significant
acquisitions of modern times.
That spring, two CEOs cast their eyes

toward the same target: Instagram.
In less than two years, the photo-
sharing application founded by Kevin
Systrom and Mike Krieger had
become a viral sensation, amassing
nearly 30 million users. Its avid user
base, image-centric functionality, and
mobile nativeness made it an
appealing target for Twitter CEO Dick
Costolo and Facebook’s Mark
Zuckerberg.
Costolo made the first move. In

March of that year, Twitter made
overtures to purchase Instagram for
$525 million, using a mix of cash and
equity. Systrom and Krieger
considered the offer – it was, after
all, quite a windfall for less than 24
months’ work – before turning it
down.
Shortly after, Instagram raised a $50

million Series B from Sequoia
Capital, valuing the business at $500
million. For a brief interlude, that
looked like the end of the drama –
Systrom’s startup would stay
independent, using its war chest to
propel its growth. Then Zuckerberg
called.
Just three weeks after breaking off its

discussions with Twitter, Instagram
announced it was joining Facebook
for $1 billion. Once again, it involved
a mix of cash and stock. According to
reports, Costolo and company hadn’t
been given a chance to counter;
perhaps, if they had, they might have
matched or surpassed Facebook’s
three-comma concord.
Later that same year, stung by

Systrom’s rejection, Twitter
purchased another upstart social
media business. That October,
Costolo’s firm paid a mere $30
million to take ownership of video
platform Vine.
There’s no doubt which proved better

value for money. Within four years,
Twitter had shuttered Vine.
Meanwhile, Facebook had swelled
from a $104 billion IPO-debutant to
a $330 billion democracy-fraying
superbeast. Such frightening, rapid
growth could never have occurred
without Instagram, with Zuckerberg’s
$1 billion outlay looking like a
rounding error. Indeed, in 2018, it
was estimated that Instagram would
be valued at $100 billion as a
standalone company. Since that
assessment, the app has doubled its
monthly active users to over 2 billion.
One moral of the story is this: the

right acquisition can change
everything. A purchaser who finds
the perfect business at the ideal time
can unlock new markets, establish
new moats, stave off decline, and

accelerate growth. Think Google
snagging YouTube, eBay grabbing
PayPal, or Disney devouring Marvel.
Another equally true moral: picking

the right acquisition is extremely
difficult. It requires a mix of vision,
operational acuity, financial
discipline, cultural awareness,
market storytelling, and timing.
There’s a reason that management
theorist Roger Martin referred to
M&A as a “mug’s game in which 70%
to 90% of acquisitions are abysmal
failures.” While one might quibble
with Martin’s methodology or
characterization, there’s little doubt
that the odds are not in your favor.
So, as a CEO driven to forge a

generational business, how can you
tip the scales in your direction? How
can you maximize the possibility of
finding the next Instagram while
minimizing the chances of selecting
the next Vine? (This is a little harsh
on Vine! Oh, well.) What should you
consider or question when the M&A
bankers come calling? In short, what
makes a great acquisition?
To answer this fundamental question,

we’ve reviewed dozens of academic
papers on the often murky world of
dealmaking, distilling the most
interesting findings. Some will
confirm your beliefs, while others
may defy them. While not a
comprehensive literature review by
any means, we hope our summations
serve as compelling food for thought.
1. Extroverted CEOs
You may not have heard of Bud
Tribble, but you know his work. In
1980, Tribble joined a small upstart
company called Apple Computer,
jumping aboard their fledgling
Macintosh development team. As
well as being one of the on-the-
ground architects of the personal
computer revolution, Tribble is also
the author of one of Silicon Valley’s
favorite terms of art: the “reality
distortion field” or “RDF.” Tribble
coined the phrase to describe boss
Steve Jobs’ startling capacity to
convince others. As another early
Apple employee remarked:
“The reality distortion

field was a confounding
melange of a charismatic
rhetorical style, an
indomitable will, and an
eagerness to bend any fact
to fit the purpose at hand.
If one line of argument
failed to persuade, he
would deftly switch to
another. Sometimes, he
would throw you off
balance by suddenly
adopting your position as
his own, without
acknowledging that he
ever thought differently.”
While possessing the capacity to

manifest RDF is not always a good
thing (See: Neumann, Adam), some
of its underlying ingredients may be
useful when making successful
acquisitions.
In 2017, academics from the

University of Waterloo and Erasmus
University Rotterdam set about
assessing the impact of CEO
personality on M&A activity.
Specifically, researcher Shavin
Malhotra and his colleagues studied
the effect an extroverted executive
had on acquisitiveness. To make this
assessment, the authors set about
trying to identify “extroversion.” To
do so, they used specialized
linguistics software to review the
earnings calls of 2,381 CEOs over a
ten-year period. Extroversion was
determined by analyzing things like
word count, word repetition,
concreteness, visual language, and
references to family and friends. This
was subsequently compared to each
firm’s M&A activity over the same
period.
As it turned out, extroverted CEOs

acted distinctly to their less
gregarious colleagues. Not only did
they engage in more frequent M&A
activity, they also tended to make
larger acquisitions. An increase in
CEO extroversion from one standard
deviation below the mean to one
standard deviation above the mean
increases the odds of making an
acquisition by 11.2%, increases the
frequency of acquisitions by 13%,
and increases the size of targets by

6.7%.
While these statistics might suggest

extroverted CEOs simply have low-
impulse control, the study also
indicated that more outgoing
executives are more successful
buyers. Namely, Malhotra et al. found
a positive correlation between a
CEO’s “extroversion score” and the
short-term movement of the
acquiring company’s stock price. (The
latter is often referred to as the
“cumulative abnormal return” or
CAR.) More concretely, a one-
standard-deviation bump in
extroversion increases the abnormal
stock returns upon acquisition
announcements by 0.2%. Though
that might not sound like much, it
translated into an average gain of
$14.7 million for companies in their
sample.
Such results beg the question: what

makes extroverted CEOs better
dealmakers? Is it simply a case of a
reality distortion field at work? That
may be part of the equation;
charisma on earnings calls can
certainly assist stock price
performance. However, it’s not the
only factor at play. Extroverted CEOs
also benefit from broader social
networks. For example, they are
more likely to serve on the boards of
other companies, giving them greater
insight into adjacent industries and
potential acquisition targets.
Verdict: Have an extroverted CEO

with a powerful public-speaking
presence and a strategic

smattering of board seats in other
companies.
2. Congruent
cultures
Ten days into the new millennium,
two media giants announced their
merger. On January 10, 2000, AOL
and Time Warner joined forces to
create a new $350 billion behemoth.
Within months, it was already being
referred to as “the worst merger in
history.”
While technological shifts

contributed to the ill-fated marriage
of AOL-Time Warner, the firm’s
differing cultures may have been
even more damaging. Richard
Parsons described his struggles
annealing the disparate entities. “It
was beyond certainly my abilities to
figure out how to blend the old
media and the new media culture,”
the Time Warner President remarked.
“They were like different species, and
in fact, they were species that were
inherently at war.”
While AOL-Time Warner may be the

canonical example of a culture clash,
it's far from the only one. In their
paper, “The Role of Culture
Compatibility in Successful
Organizational Marriage,”
researchers Susan Cartwright and
Cary Cooper assessed the importance
of cultural fit in brokering an
acquisition.
To make their analysis, the authors

interviewed employees at both
acquired and acquiring companies
over a three-year period. They
gathered data via surveys. In
particular, Cartwright and Cooper (a
duo that sounds like they should be
headlining a procedural drama on
TNT) used these methods to capture
measurements of organizational
commitment, job satisfaction,
employee stress, and mental well-
being. They also examined
behavioral indicators like employee
turnover, sickness, and absentee data.
Taken together, these findings
revealed the cultural style of different
organizations and their effectiveness
at integrating with another firm.
Before turning to Cartwright and

Cooper’s findings, it’s worth
discussing the point of cultural styles.
They are critical to understanding the
study’s results. They also happen to
be fascinating. The authors divided
companies into four cultural
categories, borrowing terminology
coined by Roger Harrison, an expert
in organizational development.
1. Zeus culture. This type of

organization is fundamentally
“power-based.” An autocratic
figure – and a select group of
managers – control the business
with little interference. This kind
of culture was common during
the rigid Industrial Revolution,
though we can see a
contemporary version of it in Elon
Musk’s forceful management of
Twitter.
2. Apollo culture. Though your

local DMV might not immediately
remind you of the gorgeous
Greco-Roman sun god, it bears his
namesake from an organization's
vantage. Apollonian cultures are
“role-based.” Employees stay
within the explicit confines of
their jobs. Bureaucracy and
procedure matter a great deal in
these organizations, commonly
found in the civil service.
3. Dionysius culture. These

organizations emphasize the
individual. They are known as
“person-based” cultures and tend
towards flat, egalitarian
structures in which employees are
given greater freedom.
Communities and non-profit
organizations may embrace this
methodology. In the business
world, Zappos’ Holacracy may be
a rare example.
4. Athens culture. This “task-based”

culture is mission-focused,
valuing knowledge and
competency. Employees act in the
way they consider suitable for the
task. Stripe may be an example,
as prior employees have
suggested without using the same
terminology.
With our categories set, let’s turn to

the results. What did Cartwright and
Cooper discover? As you might
expect, our crime-fighting duo
discovered that culture mattered a
great deal in the success of a merger

or acquisition. While every marriage
is unique, Cartwright and Cooper
argue that some cultural
combinations are likelier to work out
than others.
For example, a buyer with an Apollo

or “role-based” culture may have
success integrating an acquisition
operating under a Zeus or “power-
based” culture. While incoming
employees may experience a culture
shock, they will likely appreciate the
perceived “fairness” of their new
home. The reverse composition has a
much bleaker outlook – when a
“power-based” culture takes over a
“role-based” business (or indeed, any
of the other categories), the results
are “potentially disastrous,”
according to the authors. Incoming
employees may react poorly to their
new strictures, resulting in increased
turnover and “culture collisions.” The
cost of these collisions can be
extremely high, reducing the
performance of the acquired
company by 25-30%.
Verdict: A task-based culture of the

acquirer – in which there’s an
emphasis on team commitment
and a belief in the mission, where
tasks are assigned based on its
requirements rather than
politicking or favors – is most
likely to result in a smooth
acquisition of the acquired
company.
3. Moving first
“The first mover advantage is a
myth,” the organizational
psychologist Adam Grant once
proclaimed in a TED talk. To back up
his position, he drew on data that
showed 47% of “first mover”
companies failed in their early years
compared to just 8% of late-arriving
“improvers.”
While the Think Again author may

have a point when it comes to
building a business, it doesn’t apply
to the buying process.
A 2008 paper published in The

Academy of Management Journal
outlines this dynamic. Authors Gerry
McNamara, Jerayr Haleblian, and
Bernadine Johnson Dykes begin by
describing the cyclical nature of M&A
activity. Between 1890 and 1990, the
US witnessed four distinct waves that
accounted for 50% of all acquisitions.
These periods of frenzy saw
thousands of companies snapped up
over a matter of years, followed by a
steep decline.
By studying 3,194 acquisitions across

a twenty-year period, the researchers
noted an intriguing relationship:
acquirers that moved early in a
market cycle found greater success
than firms that jumped on the M&A
bandwagon later. As shown in the
chart below, companies that move in

the first 5% of a new wave see
positive abnormal returns of 4.2%.
By contrast, those who make an
acquisition at the height of a wave
(roughly 65% through) see an
abnormal return of -3%. As a wave
heads towards its culmination,
returns gradually improve, charting a
U-shaped curve.
What explains this pattern? Why do

first-movers see positive returns, but
those in the middle of the pack
don’t? A few dynamics are at play.
For one thing, first movers may be

acting on asymmetric information –
they know something that the rest of
the market doesn’t yet. Because of
this, they may be able to secure a
deal at a reasonable price compared
to those that follow. Additionally,
they have their pick of available firms
with little to no competition.
As more companies begin to partake

in M&A, the environment shifts. Now,
potential acquirers face significant
competition, driving up prices,
limiting selection, and forcing fast
decision-making. The result is a
string of hasty, costly, and ill-
conceived marriages that only let up
when the market cools.
Verdict: If you possess asymmetric

information indicative of a
technological or market trend, you
should move early. If you don’t,
hold off – and be careful not to

copy a competitor blindly.
4. Practice makes
perfect
Over their lifetimes, Apple, Amazon,
and Facebook have all made more
than 100 acquisitions each. Google
has made more than 250. Such
volume is no accident. The best
companies understand that to find
game-changing deals, you have to
make M&A a habit.
Research from Sam Rovit and

Catherine Lemire bolsters this
position. The duo analyzed 725
American companies with revenues
over $500 million. In looking at this
sample, the authors focused on the
7,475 acquisitions made between
1986 and 2001 and the excess
returns they delivered to
shareholders. The authors defined
“excess returns” as “the total return
to shareholders, including dividends,
minus the cost of equity, or the
investor’s expected return.” They
then set the average excess returns at
1.
Rovit and Lemire split the frequent

buyers into four groups:
“Constant buyers” bought

consistently through economic
cycles.
“Recession buyers” increased their

buying in recessionary periods.
“Growth buyers” primarily bought
in periods of economic growth.
“Doldrums buyers” tended to buy

in stable or slightly uncertain
periods.
As it happened, “constant buyers”

proved the most successful by some
distance. Not only did they
outperform “doldrums buyers” by
1.8x, they surpassed “growth buyers”
by 2.3x. “Recession buyers” had the
second-best results, outperforming
their growth-focused counterparts by
1.4x.
The authors subsequently honed in

on what they termed “frequent
buyers” – companies from any of the
four categories that had completed
more than 20 deals over the fifteen-
year period studied. In simple terms,
the authors effectively found that the
more deals a company made, the
more value it could deliver to
shareholders. “Frequent buyers”
delivered 2x excess returns compared
to “nonbuyers” – companies that
made no purchases during that stint.
Are Rovit and Lemire’s results an

invitation to spray and pray? Should
every company stampede to their
nearest investment banker’s office?
Not quite. As it turns out, the most

successful “frequent buyers” tended
to follow a set of implicit guidelines:
1. Calculated bets. They started

with small deals, institutionalized
processes, and created feedback

systems.
2. A prepared mind. They

continually reviewed targets and
kept lists of potential acquisitions
they considered attractive should
they become available at the right
price.
3. A team of specialists. They built

a standing acquisition team,
allowing the company to strike
quickly and effectively when the
right deal arose.
4. Buy in from above. They

involved management early in
due diligence and devised clear
guidelines for integrating
acquired firms.
Verdict: Buying at the right price is

an essential factor when reviewing
a singular acquisition. Over time,
however, if a company is making
many acquisitions, a dollar-cost
average approach will work better
than trying to time the market.
5. True synergy
Few words evoke as disgusted a
reaction as “synergy.” It is among the
most-hated business buzzwords on
the planet – a synecdoche for
corporate mundanity, fluorescent
meeting rooms, and brainless
PowerPoint presentations. Yet, in its
truest sense (liberated from its
cultural baggage), it is the ultimate
M&A achievement.
How can one achieve it? And what
does synergy actually look like?
The great Clayton Christensen offers

a persuasive depiction. In his paper,
“The New M&A Playbook,” the late
Harvard theoretician posits that, for a
great acquisition, the acquirer needs
to look at the critical acquired
resources, as well as customer
behavior. In a word, synergy.
Christensen and his co-authors

provide a charming, seasonal
example to illustrate the point:
“Many New England

homes are heated with oil
in the winter. Oil retailers
typically make monthly
deliveries. Suppose one
retailer buys a competitor
that operates in the same
neighborhood. In that
case, the parent buys the
competitor’s customers
and can eliminate the
duplicate fixed costs of
two trucks serving
neighboring customers.
Here, the critical acquired
resource is not the trucks
or drivers, which the
company does not need to
serve the new customers;
it is the customers
themselves, and they are
plug-compatible with the
parent’s resources,
processes, and profit

formula. That’s why the
deal will lower the
acquirer’s costs.”
Compare that with a situation where

the retailer purchased a similar firm
in a different city. In that case, the
purchased company would replicate
the parent’s cost position in a new
geographic area rather than reducing
it. There might be some overhead
efficiencies, but the acquirer would
save less money as the oil retailer
would need the acquired company’s
trucks to service its new customers.
Another temptation would be to try

and cross-sell the oil retailer’s
customers. They already buy oil from
us, so why not sell them something
else? Christensen warns that
acquisitions whose rationale is to sell
a variety of products to new
customers will only succeed if
customers need to buy those
products simultaneously and in the
same place. Again, “The New M&A
Playbook” elegantly lays out its
argument:
Let’s say Clayton

Christensen is a typical
shopper, who buys both
consumer electronics and
hardware. Wouldn’t
Walmart, which carries
both product categories,
have a better chance of

winning his business than
Best Buy, which sells only
consumer electronics, or
Home Depot, which sells
only hardware? In a
word, no. That’s because
Clay needs to buy
electronics just before
birthdays and holidays,
whereas he needs to buy
hardware on Saturday
mornings, when he
intends to repair
something at home.
Because these two jobs-to-
be-done arise at different
times, the fact that
Walmart can sell him
both kinds of products
does not give it an
advantage over the
specialists. Typical
shopper Clay does,
however, buy gasoline and
junk food at the same
time—when he’s on a
road trip. Hence, we have
seen a convergence of
convenience stores and
gas stations.
Verdict: Consider acquisitions that

contain critical acquired resources
(trucks in the neighborhood) or
true customer behavior (crossover
in purchasing patterns.) Ideally,

both!
PUBLISHED BY
Mario Gabriele
Founder and Editor of The Generalist
The Generalist’s work is provided for

informational purposes only and should not be
construed as legal, business, investment, or tax
advice. You should always do your own research
and consult advisors on these subjects. Our work
may feature entities in which Generalist Capital,
LLC or the author has invested.
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| The Generalist 15/11/2024, 12:00 am

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COMPANY BUILDING Nov 2, 2023

Artwork by Harol Bustos

Masterworks VENTURE CAPITAL

The Best Venture Firm

million and everyday Dec 3, 2023

When the painting by master The History of AI in 7

offering received their share of Apr 2, 2023

the net proceeds.

All thanks to Masterworks, the

date, every one of

I’ve been investing with

So how does it work?

Shares of every offering are

If you only have a few minutes

Confident, outspoken chief

Culture wars. Can an

Need for speed. M&A

1990, for example, 50% of

Let’s begin with a true story. We can

It was the best of times, it was the

Eurozone crisis, it was the year of the

That spring, two CEOs cast their eyes

Costolo made the first move. In

Shortly after, Instagram raised a $50

Just three weeks after breaking off its

Later that same year, stung by

There’s no doubt which proved better

One moral of the story is this: the

new moats, stave off decline, and

Another equally true moral: picking

So, as a CEO driven to forge a

To answer this fundamental question,

“The reality distortion

While possessing the capacity to

In 2017, academics from the

As it turned out, extroverted CEOs

and increases the size of targets by

While these statistics might suggest

Such results beg the question: what

Verdict: Have an extroverted CEO

presence and a strategic

While technological shifts

While AOL-Time Warner may be the

To make their analysis, the authors

Before turning to Cartwright and

1. Zeus culture. This type of

2. Apollo culture. Though your

3. Dionysius culture. These

4. Athens culture. This “task-based”

With our categories set, let’s turn to

great deal in the success of a merger

For example, a buyer with an Apollo

Verdict: A task-based culture of the

While the Think Again author may

A 2008 paper published in The

By studying 3,194 acquisitions across