How to Defy the Odds and Grow Value Through Acquisitions?

The dramatic bidding war between Paramount and Netflix for Warner Brothers Discovery reminds us that mergers and acquisitions (M&As) remain an ambitious CEO’s favourite gambit. But executives are invariably shocked to learn that study after study show that 60-90 percent of M&As fail – whether that’s failure to achieve expected synergies or a complete failure that splits up the company a few years later. General Electric (GE), arguably the world’s most admired company back in 2000, has become a shadow of its former self after two decades of aggressive M&A-fuelled growth under CEO Jeff Immelt, the hand-picked successor to Jack Welch. GE’s value plummeted 40 percent from US$400 billion in 2001 in US$240 billion in 2017, while the overall value of S&P 500 companies grew by 125 percent over the same period. GE continues to shed assets and was ultimately removed from the Dow Jones Industrial Average in 2018 after more than a century on that blue-chip index. One clear indication that most M&As fail to create value is that in 90 percent of the M&As involving a publicly listed buyer, the buyer’s stock price falls upon announcement. Markets can be imperfect but this persistent signal tells us that more often than not, investors are unconvinced when executives talk about growth and “synergies” through an M&A. Growing through acquisitions  Paradoxically, no hyper-successful company has simply grown organically; they all have M&As in their back story. Walt Disney Company, Salesforce and Cisco Systems are all examples of firms that have flourished thanks to their strategic purchases. Another is LVMH, leader in the luxury industry and one of Europe’s most valuable firms. LVMH currently controls 75 individual maisons, having made no fewer than 25 acquisitions over the past 25 years. The company’s market capitalisation has expanded 20 times (see chart); its turnover grew seven times from €12.5 billion euros in 2004 to €86 billion in 2023, while net profit leapt 12-fold from €1.2 billion to €15 billion. The luxury giant achieved what is often attributed to tech platforms – growing sales while expanding margins.

LVMH’s dominance in the luxury industry is almost entirely driven by its M&As. But how did it do it? What does it do differently to defy the typically terrible odds of M&A success? Here are three lessons from the French conglomerate: 1. Reject synergy  Executives almost always tout synergies when talking about M&As, be they cost savings (the “subtraction” synergy), or revenue upside (the “addition”, or 1+1=3, synergy). LVMH never tries to achieve either form of synergy by combining different brands. Instead, the company ensures that each maison maintains its own identity, so much so that customers may never see the corporate ownership. For example, luxury-clad fashionistas need not—and many do not—know that Bulgari, Dior or Fendi are all owned by LVMH. What the Group does provide each maison, however, is an integrated backend covering logistics, technology and financial discipline. LVMH is a constellation: on the creative side, individuality is fiercely maintained; on the operations side, the corporation consolidates and streamlines business capabilities. This approach is similar to that of private equity firms such as Blackstone and holding companies such as Berkshire Hathaway. Stephen Schwarzman, founder and CEO of the Blackstone Group,  said that Blackstone buys IT services for all its portfolio companies and therefore can get prices that individual firms cannot. Warren Buffett, chair of Berkshire Hathaway, has stated that he lets his companies “run their own lives” and that “synergy is a word used for acquisitions that otherwise don’t make sense”. But behind the independence, there is a shared set of business practices and disciplines that make the collection worth more than the sum of parts. 2. Know what you want to buy and what you want to do with it  In the small world of luxury, one always knows the brands that are “in play”. Unlike private equity and traditional economy companies, however, valuation is high – luxury does not sell on the cheap. For an acquisition to be a success, there must be a clearly defined thesis of why you should own it. What does it bring to the group and vice versa? As the world’s largest luxury group, LVMH is constantly approached by intermediaries offering potential targets. But the group never buys a company that is being “marketed” by an adviser. Its leaders make their own judgment about what to buy or not to buy. And when valuations are high, acquirers need the discipline of developing a comprehensive and detailed revenue enhancement plan prior to the acquisition in order to create value post-acquisition.  The interconnected “small world” reality and high valuations for prime targets are factors that are in play in many industries beyond luxury. This lesson of “know your target” and “know yourself” aligns with another Stephen Schwarzman insight: 40-percent of whether a deal will make money (add value) or not is determined before the deal, and is based on the price. Understanding that reality should be the guide to whether you decide to buy it or not, and what your post-acquisition plans (at least roughly) are. 3. Focus on the long-term 

This may not sound like a revolutionary concept, but when your stock fluctuates daily and when analysts and markets react to quarterly earnings reports, focusing on the long-term is not easy and takes courage. Instead of focusing on short-term return on investment, LVMH is willing to invest and even lose money, for up to five years. This ensures time to revamp marketing and restore the brand, in order to build lasting brand awareness and customer loyalty. A truism in finance is that it takes money to make money. For the luxury business, brand loyalty is the single most important intangible asset that gives a company a “moat” – the ability to increase prices and not lose customers – and in LVMH’s case, increase sales. But it’s important to remember that building such brand loyalty – and the culture and heritage behind it – needs time. Applying the lessons These fundamental lessons from LVMH’s approach to M&As—apply financial discipline, exercise judgment, and have a long-term focus—are applicable to industries beyond luxury. Finally, one should never underestimate the role of luck. Mistakes and lucky breaks happen in the ebbs and flows of fashion and among the bulls and bears of the market. CEOs should be able to adjust to these fluctuations and remember that mistakes are often made in good times and bills come due in bad times.  In other words: maintain a long-term focus, and don’t be swayed by the ever-changing tides.   This article is based on a fireside chat between Lily Fang and Jean-Jacques Guiony held at the INSEAD Asia Campus last year for the Singapore Business Federation’s young leaders group and the European Chamber of Commerce.