Hewlett-Packard (HPQ) just wrote down about 80 percent of its purchase price for software company Autonomy and is now in a nasty PR battle with Autonomy’s founder about the company’s real sales figures. And yes, HP has also written down billions of dollars from its purchase price for EDS, a buy that was supposed to make it more competitive with IBM (IBM) in services. Having also hired a series of outside chief executive officers—all of whom left under duress—the company offers a cautionary, well-documented, but nonetheless oft-ignored tale for other companies. Intel (INTL), for one, seems to be flirting with the idea of going outside for a successor to CEO Paul Otellini, who has announced he will retire in May.
The fundamental problem is simple: Companies frequently seek outside solutions to their problems in product strategy or leadership. They are making acquisitions to acquire new capabilities and yes, searching for some form of corporate savior to compensate for what seems missing internally. The temptations and pitfalls in both moves are similar. From the outside, technologies and products look glamorous because their defects and difficulties are much less visible. From the outside, the new executive looks intriguing and exciting because the inevitable human foibles and weaknesses aren’t yet evident, because scarcity makes things appear more valuable, and because in the recruiting chase, the excitement builds.
In both instances, there are “matchmakers”—executive search firms in the case of the external hires and investment bankers for the deals—who get paid only if the transaction is consummated. They have every economic interest to not only see the deal close, but close quickly. And then there are the “sellers,” the founders or current executives peddling their company or the outsiders being interviewed for the senior role. They, too, have little incentive to be fully forthcoming about weaknesses and problems, as well as strengths. Their payoff comes from being seen as attractive; the more attractive, the more market demand and the greater their price.
What about due diligence, you might ask? There’s little incentive for the brokers to do anything but close the deal. Once the sellers get bought, they can count on the principle of psychological commitment to enable a purchaser to rationalize how great the transaction was, regardless of how things turn out. That leaves the buyers, who are often motivated as much by hope and the wish for things to work as by the discipline to spend shareholder money wisely. Plus, once the purchasers have invested both effort and their identity and prestige in beginning the transaction, escalating commitment takes over.
As demonstrated by the evidence, including a meta-analysis of studies covering more than 200,000 mergers, technology mergers seldom work out. Indeed, most mergers do not. What happened at HP is quite common. The problems are both legion and foreseeable: Much of the acquisition’s value is in the people, but with few exceptions (Cisco (CSCO) being one) most acquirers do a crummy job of integrating the new folks, so they leave. Note how many Autonomy people, and not just the senior executives, are already gone. The exodus from human capital software companies SuccessFactors (purchased by SAP (SAP)) and Taleo (bought by Oracle (ORCL)) continues the long tradition by which purchased human capital then heads for the door because it has made money from the purchase—and even more because it is clear who the new bosses are. Customers sometimes move with the ex-employees. In any case, integrating new products and technologies requires more skill than most companies seem to have. The evidence on hiring talent is about as bleak. As Harvard Business School professor Boris Grosyberg reported, talent is not as portable as people think it is, and few companies have gotten anything like what they have thought they had hired.
All this “academic” research doesn’t matter much to the boards and companies doing the hires and making the acquisitions. That’s because they are special—above average—and believe the statistics don’t apply to them. Companies would be well-served to avoid the lure of the “outside” deal or person to save them. The temptations are great and the results of such flings seldom work out.