The M&A failure rate – typically 70% to 90% of acquisitions are unsuccessful – has held constant for almost 100 years. This dismal record indicates a pattern of disappointment that has caused serious damage to companies and their boards of directors, further devaluing stock price and shrinking confidence of shareholders. Yet, we know when done correctly acquisitions and mergers are extremely beneficial to everyone. In analyzing a recent set of events between Novartis and Alcon, we peel back the history to get a look at what went right and what may have gone wrong in their 2010 deal and what to expect from their recently announced divestiture of the Alcon business.
Some of the pertinent facts of the 2010 acquisition: Novartis purchased Alcon in three phases, finalizing the deal in 2010 and valuing the transaction at $51.6 billion. The expectation of synergies for the business was strong, looking primarily to the attractive promise in emerging markets. The other opportunity frequently cited as a deal driver were the innovative products Alcon was expected to bring to market. Both Alcon and Novartis were eager to take advantage of their innovation capabilities.
One of the main opportunities for synergy between the two businesses was related to the ophthalmologic pharmaceuticals business which Novartis quickly integrated into their Innovative Medicines Division. These products generated $4.6 billion USD in sales in 2017 and have a robust pipeline in development.
Fast forward to 2018, when Novartis announced that a 100% spinoff of Alcon (focused exclusively on surgical and vision care) is in the best interest of shareholders. This sale, along with the divestment of the consumer healthcare joint venture with GSK and the net of the AvXis acquisition payments will result in a $5.0 billion USD share buyback for Novartis shareholders.
So, the question remains, was the Alcon acquisition a good deal for Novartis investors?
That answer will depend on the valuation of the standalone company. With approximately $7 billion USD in annual sales in 2017, Alcon is unlikely to be valued near the 2010 acquisition price, especially considering that Novartis will retain the prized ophthalmology pharmaceuticals. The emerging market opportunities never seemed to materialize for Alcon in a significant way under the Novartis umbrella.
What is easy to forget when considering an acquisition of a complex multi-national company is that innovation is not easily copied. What works for one business rarely works for another, no matter how similarly suited their businesses. Transferring innovation capabilities to a newly acquired company with a different approach to R&D, a different culture, and different customers is extremely difficult.
It is very common for acquiring companies to become overly optimistic about deal potential during due diligence and rarely do efforts go beyond financials to include industry-specific strategy, people, technology, human resources, and organizational design expertise. Perhaps this divestiture will drive the accelerated growth at Alcon that the M&A deal-makers originally thought possible. No matter how thorough due diligence is, it usually misses the realities of the business, especially those intrinsically attached to the deepest components of the industry and subsectors they serve. It is easy to misinterpret the financial potential of a transaction because issues commonly arise the execution of the business integration or in the post-integration value realization.
We continue to advise companies to conduct industry focused target screening, valuations, and due diligence, supplement the financial focused team with industry experts who can investigate in the right areas, and provide realistic estimates to the deal before striking the purchase. Augmenting the team with the right complementary skills will likely move your organization into the few that can count success as part of the M&A transactions.
Co-authors and contributions by Stephen Moulton and Evan Shirley.