A little experience is worse than no experience…


People with a little experience perform worse than those with no experience.  That’s the key finding of a study into M&A performance by Cornell University almost twenty years ago.  Has that changed anything?

Evaluating 449 acquisitions, Cornell found a bathtub ‘U-shaped’ relationship between performance and experience. Using abnormal stock price returns as the key metric, performance level takes a nosedive once some experience is acquired and only picks up once considerable experience is achieved.  

John Plender was famously quoted in the Financial Times as saying that “M&A is a skill that needs to be learned”: it seems that the learning process is more extended and perhaps a little more complicated than most people realise (it’s much less ‘classroom’ and much more ‘workplace’).  That means infrequent acquirers never build up the critical mass of experience, and risk falling in to the bucket of weaker performers. 

The study found that we incorrectly generalise from the first deal and try to implement the next one the same way. This generalising continues for an average of 8 deals. It takes deeper experience to acknowledge that each deal is different and that respecting and acting on these differences is the first step on the path to success.
So what does real commitment actually mean and what are the key indicators that you might want to look out for? It is after all hard to judge commitment from the inside! 

We would suggest that the indicators below might be a good starting point to assess commitment:

  • Fluid and responsive structures (organisational). 

  • Sensible, socialised and valued standardisation with empowerment for the leaders to vary for sound reasons (Zeinep Ton talks about this in a different context, worth a read).

  • A clarity of purpose which is both simple (easy to articulate) and focused (fewer rather than more initiatives). 

  • High quality of dedicated internal resources. This is not about throwing the kitchen sink (financially speaking) at the transaction…it’s about recognising the truly transformative nature of the transaction and being willing to bet the best people on it.

Why these four? In each case, the outcome is simple but the effort to get there is considerable…that’s commitment in our eyes.