What Is Acquisition Indigestion?

Acquisition indigestion is a slang term that describes the practical difficulties that a company may face while adjusting to the consequences of a merger or acquisition deal. The integration process can be a rocky one.

Employees can become stressed by the uncertainties inherent in a merger or acquisition involving their company. Dual departments can have a hard time combining into one. Rival teams can arise. Corporate cultures can clash. Routine business can be badly disrupted.

Key Takeaways

  • Acquisition indigestion is a symptom of a failure in integrating two companies after a merger or acquisition.
  • The purpose of any acquisition is to expand a company's growth potential.
  • Poor implementation of a merger can stymie that growth.

Understanding Acquisition Indigestion

When a public company announces a merger or acquisition, Wall Street is often pleased. It's a move that should signal that a company is expanding into a new area, increasing its market share, eliminating a rival player, or some combination of all of these.

However, investors cannot be expected to be particularly patient when the merger or acquisition does not proceed smoothly.

Broadly speaking, acquisition indigestion is a symptom that the company that has made a merger or acquisition happen is having difficulty making the most of it.

It occurs often when a company acquires another company in order to increase its earnings growth, only to find that it lacks the necessary infrastructure to successfully absorb and manage its acquisition.

Taking the Term Literally

The term acquisition indigestion can be taken quite literally. The acquiring firm really has bitten off more than it can chew, and the result is painful.

This outcome can be anticipated if a company chooses a target that is unlikely to integrate well with it, or acquires too many targets too quickly.

Risking Acquisition Indigestion

Acquisition indigestion may more delicately be termed integration risk. A merger that looks great on paper may be more difficult to implement than expected. The company that initiated the merger may fail to meet the goals they set for the combined company.

In the end, those high expectations caused it to pay more than it should have for the deal.

The shareholders of the company that was acquired, on the other hand, may not suffer from acquisition indigestion. If they time it right, they could walk away with a good profit, leaving others to experience the ill effects.

Examples of Acquisition Indigestion

Some of the biggest merger and acquisition disasters in American business history are cautionary tales of acquisition indigestion:

The 2005 takeover of Nextel Communications by Sprint looked like a winner: Nextel had a strong base of business customers while Sprint catered to the consumer market. Soon, Nextel executives were leaving in droves. Used to an entrepreneurial environment, they were turned off by Sprint's bureaucratic culture.

The 1968 merger of New York Central and Pennsylvania Railroad was probably a bad idea from the start, given that railroads were facing increased competition from the trucking industry. But it was really doomed by the internal culture clash, territorialism, and poor integration of processes and systems.