A term that refers to the adjustment difficulties that a company faces after an acquisition. Long-term acquisition indigestion can be a sign of a failed acquisition deal.
Acquisition Indigestion Details
The integration of two companies after an acquisition can be difficult, especially when the parent company ventures into unknown markets. The idea behind an acquisition is to expand revenues and increase market shares. Business owners must thoroughly study the research and viability of such an acquisition to avoid acquisition indigestion. Often the company may not have the necessary infrastructure or the technical know-how to succeed in a new market.
The employees of the two companies suffer a lot as a result of a failed acquisition. The integration of departments in the two organizations might not be as smooth as expected. Disillusionment can arise amongst employees when their company spends millions of dollars on mergers and acquisitions. They might feel the company could better utilize that sort of money in improving their work life.
The stock prices of a company immediately rise when they announce a merger or acquisition. Such a deal usually indicates the desire of a company to venture into new markets, expand its horizons and increase its market share and revenue. However, investors can quickly turn on the company, and stock prices can fall drastically if the investors do not see a clear growth post the acquisition. You could also broadly term Acquisition indigestion as an integration risk for the stakeholders in both companies involved in the acquisition.
Real-World Example of Acquisition Indigestion
One of the most prominent failed acquisitions in history is when America Online acquired Time Warner in 2001 for a whopping $165 billion. The stakeholders at America Online drastically overpaid in the hope of tapping into the new world of mass media and the Internet. The calculations went horribly wrong, and America Online reported a loss of $99 billion in 2002, the largest annual net loss ever reported. America Online executives eventually realized that technical know-how in the internet industry was not enough to run a medial conglomerate with over 90,000 employees.
Daimler-Benz acquired Chrysler in 1998 for $36 billion. The ambitious coming together of two highly prestigious organizations did not come off as expected due to cultural differences. The decision-making structure at Daimler-Benz was methodical and top-down oriented, whereas, at Chrysler, the decision-making was creative and unstructured with a flat hierarchy. Eventually, Cerberus Capital Management purchased Chrysler for just under $7 billion.
Another example of a failed acquisition is eBay's acquisition of Skype in 2005. eBay acquired Skype with the intent to change the way buyers and sellers communicate with each other in the online marketplace. They expected people to communicate over Skype for their business transactions. This did not turn out as expected, and people just preferred using email to communicate rather than using Skype, forcing eBay to sell two-thirds of Skype for $1.9 billion four years later.
Significance of Acquisition Indigestion
Acquisition indigestion quite literally can mean the difficulties that a company goes through post an acquisition. An acquisition deal might look good on paper, but its integration into valuable business operations can be complex. A failed acquisition can impact the two companies in the short and long term to decrease stock prices and dissolving capital structure. The future growth prospects of the companies involved can be slim.
Overpayment in an acquisition can be an early sign of a failed acquisition deal. A company might overpay drastically to fend off competition in acquiring another company. Such calculations and high hopes might not pay off as expected and could significantly damage both companies.