This is some text inside of a div block.
This is some text inside of a div block.
Failed mergers and acquisitions are probably more common than we’ll ever know. Executives are rarely keen to divulge the details of deals that went wrong, preferring instead to focus on those that generated value.
Below, FirmRoom analyzes 9 deals which undeniably destroyed value, and provide anybody considering an M&A transaction with a series of cautionary tales.
Check also: 11 Biggest M&A Deals of 2022 (So far)
Date: March 19, 2009
Value: $590 million
Industry: Consumer technology
When Cisco acquired Pure Digital in 2009, it was a classic case of not understanding where a market was headed. Pure Digital’s biggest selling product was a digital video camera, released right at the time when even the cheapest cell phones were being equipped with high quality camera technology, and YouTube was cementing its unassailable lead in streaming.
The deal formed part of a wider Cisco strategy to build a consumer technology division that had seen it acquire Linksys routers and its Scientific-Atlanta cable set-top boxes over the years leading up to the Pure Digiital deal.
On closing the deal, Ned Hooper Cisco’s Vice President of Corporate Development and Consumer Groups noted: "Pure Digital has revolutionized the way people capture and share video with Flip Video.” When a buyer uses the word ‘revolutionary’ in any of its forms to describe a deal, hubris is seldom far away.
Within two years, Cisco had realized its error and wrote off the investment, pulling Flip from the market, instead returning to its core business of networking. When it comes to making a bet on where consumer technology is headed, buyer beware.
Date: October 3, 2011
Value: $12 billion
When Reuters announced that Hewlett Packard’s acquisition of Autonomy had closed in October 2011, it referred to it as “the centerpiece of a botched strategy shift” that cost the previous CEO his job. It wasn’t hardly a glowing endorsement of the deal, but probably even Reuters didn’t know how bad it was going to get.
Where to begin with how bad the deal was from the outset? A good place to start is the acquisition price - a 60% premium over Autonomy’s value at the time. About six months later, one of HP’s management team at Autonomy raised concerns over its accounting practices. Shortly afterwards, Autonomy’s CEO was fired for failure to hit agreed targets.
By November 2012, an audit by PWC revealed accounting improprieties, misrepresentations, and disclosure failures amounting to around $5 billion. The company immediately announced an $8 billion write-down of the acquisition. The case became so big that even the Department of Justice became involved.
The Autonomy disaster was drawn to a close in 2017 when HP sold off its entire software division of $2.3 billion. Not for the first time, a company highly experienced in dealmaking had destroyed billions in value by failing to conduct extensive due diligence.
Date: May 20, 2013
Value: $1.1 billion
Industry: Technology (Social Media)
The blogging site Tumblr recently turned 15 years old. Just three years after its foundation, the microblogging site had over 1 million users (including several high-profile celebrities), a handful of private equity investments under its belt, and a valuation of close to $1 billion.
That’s when Marisa Meyer of Yahoo! Stepped in. Meyer, through little fault of her own, was having a torrid time as CEO of Yahoo, which had the enviable task of competing directly with Google. Her desperation may have been one of the factors that led to the company overpaying for Tumbler, closing the deal for $1.1 billion.
On closing the acquisition, Meyer promised not to “screw it up,” and suggested that the acquisition could help to grow Yahoo’s audience by 50%, enabling it to compete with Facebook. This was never a realistic ambition and ultimately led to the company setting sales targets that led to sales team discontent and a wave of exits of key people.
With the integration failing, Yahoo had to admit that it had ‘screwed it up’ afterall. In 2015, it wrote off the investment with a write-down value of $712 million - $350 million in value destruction in each of its first two years at Yahoo. Two years later, the company was sold to Verizon and the Yahoo-Tumblr nightmare was over.
Date: March 21, 2012
Value: $210 million
Although Zynga’s acquisition of OMGPOP in 2012 isn’t among the biggest M&A failures in terms of transaction size, it makes this list because of the clear lack of any strategic focus underpinning the deal. This deal was driven by little else but management hubris.
In 2021, with Zynga’s Farmville riding high, the company was cash rich. With retrospect, it seems the money was ‘burning a hole in the pocket’ of Zynga CEO, Mark Pincus. Although OMGPOP had a portfolio of over 30 mobile games, Draw Something was the only one bringing in significant revenue.
In the week before the acquisition, over 1 billion drawings (mostly doodles) had been created on OMGPOP, so it was undoubtedly popular. Within a month, its userbase was down by a third. Within 6 months, it had laid off 20% of its staff, had began phasing out games from its portfolio, and had written off half the value paid.
It was the death knell for OMGPOP. Approximately one year after the acquisition, Zynga closed the OMGPOP studio entirely. A $212 million fiasco that lasted barely 12 months.
Date: June 6, 2012
Value: $677 million
Industry: Industrial equipment
On the surface, Caterpillar’s acquisition of ERA was the ideal transaction for it to enter the Chinese market, whose mining industry was set for unprecedented growth. In theory, the ERA deal gave them an ideal platform for exploiting that growth.
There was just one problem: Caterpillar’s enthusiasm for the deal may have led it to overlook due diligence. Less than six months after the deal was announced, the board was being sued by shareholders for missing obvious ‘red flags’ that should have made the deal a no-go.
At the end of 2012, a full audit of the Chinese equipment manufacturer revealed “deliberate, multi-year, coordinated accounting misconduct” at the company, which painted a far less rosy picture of the company’s financials than had been disclosed before the transaction closed.
The accounting misconduct led to Caterpillar writing down $580 million - 86% of the entire transaction value. The deal offers a cautionary tale for any buyer that believes they can make a killing in M&A without thorough due diligence.
Date: February 11, 2008
Value: $500 million
Industry: Consumer technology
For a company that has remained an industry leader in a highly competitive space for nearly 40 years and has occupied the ‘largest company in the world’ tag for most of that period, it’s quite remarkable how hit-and-miss Microsoft’s M&A history has been. Nowhere is this better exemplified than its transactions in mobile technology.
The best known example of this was its bunged acquisition of Nokia, but the 2008 acquisition of Danger was a massive flop in its own right. At the time of the transaction, Danger had almost a decade of mobile cellular industry experience, creating what it termed: “better customer experiences on mobile.”
If only Microsoft’s experienced with mobile had been better. Together with Danger, it began working on its first mobile venture: The KIN I and II. After more than $1 billion in R&D and marketing costs to bring the phones to the market, they were widely regarded as a disaster - Wired gave both a score of 0/10.
Both phones were pulled from the market within two months. With most of the Danger team now extremely low on morale, many were poached by Google, and were credited with bringing the Android ‘material design’ look to fruition.
Date: July 18, 2005
Value: $590 million
Industry: Technology (social media)
News Corporation’s acquisition of MySpace looked like a textbook horizontal acquisition by the usually savvy media conglomerate. At the time of the deal, MySpace was the most visited website in the world - incredibly beating even Google. Little wonder then, that two years after the acquisition, MySpace was already being given a valuation north of $10 billion.
The rest, however, is history. In addition to filling its interface with ads - recall that this was something Facebook studiously avoided for years - MySpace also kept all development in-house, at a time when APIs were becoming the best way to generate network effects. Facebook took over and MySpace was eventually sold for a measly $35 million in 2011.
This is the second social media-focused acquisition on this list, giving some insight into how companies tend to chase and then overpay for the ‘next big thing.’ The fact that MySpace continues to operate, and with a staff of over 100, says that there’s a decent business model in place - just not one that could justify a $550 million pricetag.
Date: May 18, 2007
Value: $6.3 billion
Another from the series ‘terrible acquisitions by Microsoft;’ this time it’s the case of Quantive, remarkably a deal which was agreed to when Bill Gates was still at the helm, albeit heading for the exit. Bill Gates’ is often quoted as saying that his favorite book is ‘Business Adventures’ by John Brooks - he may have momentarily forgotten the books key lessons for this deal.
Shortly before this deal, Google had acquired DoubleClick, leading some to believe that it spurred Microsoft into a quicker transaction than it would otherwise have wanted. The trend was moving towards display rather than search ads, but it wasn’t a trend that Microsoft heeded with Quantive. Key team members at Quantive continued to jump ship, and before long, the company was a shell of the one that Microsoft had acquired.
In 2012, Microsoft admitted its errors in integrating the company, and wrote off close to $6 billion in value - not the last time it write off billions on a single acquisition so that decade. Famously, CNN came to term the deal “Microsoft’s $6 billion whoopsie.”
Date: March 8, 2006
Value: $5.4 billion
Industry: Energy (nuclear)
Two big alarm bells sounded as soon as Toshiba announced its acquisition of US power plant company Westinghouse in 2006. First, it dangerously stretched the Japanese electronics maker’s balance sheet to near breaking point and the fact that it was 3 times what Westinghouse initially thought it would fetch on the market.
The transaction was a one-way bet on nuclear power at a time when oil and gas prices were on an ascent that would see them reach historic highs a short time after the deal closed. For Toshiba to generate value from the deal, however, everything had to go to plan. And that so rarely happens. Construction costs and delays at big plants generated huge losses and soon Toshiba was on the brink of bankruptcy - almost entirely because of this deal.
Things went from bad to worse for the deal, and it was eventually forced to accept $2.3 billion in writdowns in 2016, and an eventual sale in 2018. By 2021, in an effort to stay afloat, it even had to sell its most valuable asset, its microchip division. A cautionary tale, if ever there was one about how a company should never overstretch its resources, regardless of how attractive an acquisition may appear on paper.
Most deals which destroy value happen because due diligence has failed at some level. Whether its failure to dig deep into the company’s financial statements, analysis of its market, or even a thorough and objective valuation of the underlying assets.
FirmRoom was designed to overcome these hurdles, providing executives with a set of tools created with the specific goal of value creation in M&A. Talk to us today about how we can make this happen.