When they can't figure out how to grow a business, leaders often turn to acquisitions. This despite the fact that every analysis ever done of public companies buying other public companies has shown that such acquisitions are bad for the buyer. Yet, after no new products at Kraft for a decade, and no growth, "Kraft shares fall on Cadbury bid, Higher offer awaited" is the Marketwatch.com headline.
Some analysts praise this kind of acquisition. And that's when we can realize why they are analysts, in love with investment banking and deals, and not running companies. "Kraft is demonstrating its operational and financial strength" is one such claim. Hogwash. After years of cost cutting and no innovation, the Kraft executives are worried they'll get no bonuses if they don't grow the top line. So they want to take a cash hoard from all those layoffs and spend it, overpaying for someone else's business which has been stripped of cost by another CEO. After the acquisition the pressure will be on to cut costs even further, in order to pay for the acquisition, leading to more layoffs. It's no surprise that 2 years after an acquisition they all have less revenue than projected. Instead of 2 + 1 = 3 (the expected revenue) we get 2 + 1 = 2.5 as revenues are lost in the transition. But the buyer will claim revenues are up 25% (.5 = 25% of the original 2 – rather than a 12.5% decrease from what the combined revenues should be.)
With rare exceptions, acquisitions generate no growth. Except in the pocketbooks of investment bankers and their lawyers through deal fees, the golden parachutes given to select top executives of the acquired company, and in bonuses of the acquirer who took advantage of poorly crafted incentive compensation plans. These are actions taken to Defend & Extend an existing Success Formula. The executives want to do "more of the same" hoping additional cost cutting (synergies – remember that word?) will give them profits from these overpriced revenues. There is no innovation, just a hope that somehow they will work harder, faster or better and find some way to lower costs not already found. Kraft investors are smart to vote "no" on this acquisition attempt. It won't do anybody any good.
Simultaneously we read in MediaPost.com, "Del Monte To Hike Marketing Spend 40%." If this were to launch new products and expand the Del Monte business into new opportunities this would be a great investment. Instead we read the money is being spent "to drive sales of Del Monte's core brands and higher-margin businesses." In other words, while advertising is off market-wide Del Monte leadership is attempting to buy additional business – not dissimilarly to the goals at Kraft. By dramatically upping the spend on coupons, shelf displays and advertising Del Monte will increase sales of long-sold products that have shown slower growth the last few years. Del Monte may well drive up short-term revenues, but these will not be sustainable when they cut the marketing spend in a year or two. Nor when new products attract customers away from the over-marketed old products. Lacking new products and new solutions such increased spending does not improve Del Monte's competitiveness.
You'd think after the last 10 years business leaders would have learned that investors are less and less enamored with financial shell games. Buying revenues does not improve the business's long term health. A cash hoard, created by cutting costs to the bone, is not well spent purchasing ads to promote existing products – or in buying another business that is already large and mature. Instead, companies that generate above-average rates of return do so by developing and launching new products and services.
You don't see Google or Apple or RIM making a huge acquisition do you? Or dramatically increasing the marketing budget on old products? Compare those companies to Kraft and you see in stark contrast what generates long-term growth, higher investor returns, jobs and a strong supplier base. Disruptions and White Space lead these companies to new innovations that are generating growth. And that's why even the recession hasn't shut them down.
