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Acquistitions - Path to glory or perdition?

03/02/2011

One of the many reasons I regret not taking a place I was once offered on the Harvard MBA course was that I would love to know how business schools teach what happens during mergers and acquisitions. In my three decades within the toy industry , the characteristics which stand out in my memory as the driving forces behind most acquisitions are not the rational calculations and objective analysis of synergies , risks and behaviour of employees, but rather the unbridled passion, self-serving egotism and yes – sometimes stupidity of the protagonists. A review of the historical record shows that more toy industry acquisitions have been disasters than triumphs.

The mother of all disasters must surely be the acquisition of The Learning Company by Mattel. To pay $3 billion for a company which was turning over $300 million and declining seems odd at best, but to pay that sum of money without completing sufficient due diligence to know it was haemorrhaging money at $100million per month strikes me as being ………(please insert here the word of your choice because I don’t seek a lawsuit for libel!)  Admittedly it was in the middle of the dotcom boom when many people were seized with such open-mindedness that their brains dropped out. When the dust settled and the chief architect of the disaster was fired with a $50 million payoff to bind her wounds. I remember asking the leading Wall Street analyst for the toy industry how he could explain this absurd reward for failure. His response was a bemused jest ‘ She must have got hold of a compromising photograph of a board director with a goat!’

Charles Lazarus , the founder of Toys ‘R’ Us, once informed the delegates of a conference, that he was buying from Hasbro a number of brands which he had once purchased from 34 separate suppliers. The acquisition of Tonka/Kenner/Parker by Hasbro was one of the great transformational acquisitions in the history of the toy industry. This is illustrated by the fact that in 1980 the global sales of Hasbro and Mattel were $80 million and $400 million respectively, so since then the relative growth of Hasbro has been much faster. The path by which Hasbro came to achieve the acquisition is intriguing. Ron Pearlman of NewLine made a failed attempt to buy Kenner/Parker, which opened up the opportunity for Tonka to make a successful bid for the business which was larger than itself , because the owner General Mills had realized that the toy division did not make sense in its portfolio. Tonka had however bitten off more than it could chew and Hasbro was able to snap up the company. It was a great purchase because Hasbro was able to leverage the brand assets much more efficiently both in the US and through its international network of subsidiaries, than had the previous owners. Another outstandingly successful acquisition was Mattel’s purchase of Fisher Price. Against the expectations of many, Mattel’s management managed to retain the strong brand values and ethos of the company and greatly build on them. However in the long history of acquisitions in the toy industry many acquired brands withered and perished along the way. For example Meccano at one stage ended up as no more than a dog-eared label on a forgotten filing cabinet. It had to be released to flourish once more on its own two feet. What remains of those former stars Galoob and OddzOn?  Brands are born and grow to success through the outstanding enterprise, genius and dogged persistence of the founders. After acquisition and deprived of this driving force within a corporate structure where salespeople gravitate to the easiest sell, many of these brands just cannot survive , because to do so in a highly competitive environment they need energy and dedication at the highest management level. Someone whose survival and income is wholly dependent on the success of a brand will battle relentlessly in a way which does not happen in a corporate structure with salaried employees.

An acquisition which has still to realize its dénouement (and to my business friends in Montréal hopefully not their dénuement) is the purchase of RoseArt. Had it not been for the unforeseeable tragedies and recalls of Magnetix, it would possibly have ended up on the positive side of the scales of historical evaluation of acquisitions.

Sometimes large toy companies have wasted money on acquisitions because the existing sales structure was already overloaded, and the top management who take the decisions have lost contact with the sales force who lack spare capacity to add lines to their portfolio without undermining sales effort on the main profit spinners. The acquisitions of Tiger Electronics and Radica spring to mind. Occasionally I talk to buyers and store owners throughout Europe to keep my finger on the pulse of the market. On more than one occasion over the years I have been stunned to be told by buyers that a salesperson has quite openly lamented having to launch a particular product because they thought it was useless. The problem can be acute when buyer and salesman have known each other for years and the salesman feels closer to the buyer than to his own employer. This problem is even more marked in the case of subsidiaries of multinational companies, not only because the salespeople are far removed from the head office by geography, language and culture, but because on occasion they are instructed to launch a new brand or range over the heads of their argument that for local market reasons it is likely to flop in their country. Even if the management of a subsidiary conscientiously overcomes their doubts and assiduously executes the instruction from the head office, they may have to put so much effort into trying to succeed that the company is damaged by the salesmen’s resource being redeployed away from the core ranges towards supporting the new brand which can only survive with an uneconomic level of support. I would strongly recommend even to the chief executives of large corporations that they occasionally spend a few hours visiting the smallest customers. Their belief that the information they receive from their direct reports, having been filtered through the personal career agendas of six layers of management, is still valid and objective, is likely to be severely undermined by the experience.

Sometimes a chief executive has an ‘idée fixe’ and gets so carried away by the self perception of strategic brilliance and infallibility that he or she rejects the carefully considered insights of those whom they have paid to undertake due diligence. Paradoxically they may reject the advice of their people because of the issue I mentioned in the last sentence of the previous paragraph.  When Tyco acquired Matchbox the chairman was clearly told by the UK subsidiary’s managing director that most of the profit was in the local brands not the international ones. The chairman’s strategic vision caused him to lose interest in the profit generators because they could not be internationally leveraged. The decision not only damaged Tyco but gave the UK managing director an opportunity to set up his own company taking with him some of the cast offs from Tyco, and he enriched himself and his colleagues by building a $200 million company. The weakened Tyco fell into the hands of Mattel, and now there is only a vestigial remnant of a former $700 million company.

Returning to my opening question of how business schools teach the process of acquisitions and mergers. Do they take a theoretical standpoint of how acquisition targets should be rigorously evaluated, synergies calculated, and risks assessed? Or do they prepare their graduates for the real world in which these rational processes are frequently subordinated to human failings of personal greed and egotism?

Andrew Dobbie is the founder and managing director of the consultancy Gameplan Europe Ltd. www.gameplaneurope.com   [email protected]

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