The pitfalls of non-core acquisitions

Five years after getting into the digital fitness app business, Under Armour recently announced it wants out. In 2015 the $4.7-billion apparel company bought $710 million worth of digital apps, including MyFitness Pal, which tracks diet and exercise for consumers. Now they want to sell it off.   

Meanwhile, Microsoft is in talks with ByteDance’s TikTok to acquire the company’s footprint in Australia, Canada, New Zealand, and the United States. While both Microsoft and TikTok are tech companies, they are clearly different in the products they offer and the brands they maintain—one being primarily focused on corporate technology to business customers and the other on video and social media for the Gen Z audience.  

Despite the obvious surface-level differences, the two transactions actually have some important things in common. Both targets are non-core assets to the buyer—which, on paper, promise new revenue streams, expanded customer bases, and changes to brand perception. It's easy to be drawn in by these promises. The problem is, of course, this sort of thing is hard. Deals like this fail to live up to their intended value time and again because they are not planned for or integrated properly.  

West Monroe’s M&A team sees hundreds of deals each year—through diligence, carveout, and integration work. The top reason acquisitions fall short? An undefined and ill-proved target operating model for the newly combined company (or “NewCo”).  

But that’s just the start.  

Under Armour’s fatal mistake: No combined operating model and minimal integration 

Let’s review what happened to Under Armour. It bought a collection of digital apps in 2015 with hopes of becoming a more “digital” company. But hope is not a strategy. When acquiring an asset outside of your core like this, the main question you need to answer is: How are the new assets going to fit into your value chain? It’s clear that Under Armour never answered this question and only mildly integrated these apps into their business. Kevin Plank, the CEO at the time, stated that “keeping the millions of loyal followers engaged long term” was a priority. While they did things like alert app users to buy new shoes after they ran a certain number of miles, they did not serve up discounts or direct links to specific UA apparel. The only apparent combined go-to-market strategy was to get people to work out more and suggest they buy more workout apparel.  

Hence, the apps’ place in the Under Armour value chain never became clear and did not reach the end consumer in a clear manner. In addition to the lack of integration through and across customer channels, the company also had no clear data integration strategy on the back end where it could at least learn more about the behavior of customers it was trying to reach. Cash might be king, but data is most certainly queen. In the end, the apps either became a distraction from growing the apparel company’s core business or they were underinvested in. Probably both.

Building out different “how will this work” scenarios is paramount to starting the deal off on the right path and does not have to wait to start being defined until after the deal is done. That means actively doing the design work and building out the “how it will work” to (1) show the integrated product experience, (2) develop the integrated technology architecture and integrated data strategy, and (3) create an organizational and leadership structure that will work to uphold the core focus of the acquired product and drive integration priorities to achieve revenue and earnings targets.

Various theories about how Microsoft can integrate TikTok—and to what extent—have emerged. Some are suggesting they operate entirely separately to allow TikTok to continue challenging YouTube while others are suggesting integration with the company’s younger, consumer audiences like Xbox users. One has to wonder, with the tight timeline, how much attention they can give to this target operating model and integration planning vs. dealing with the various government issues just to complete the deal, not to mention separating TikTok from ByteDance. (The U.S. government has said it will ban TikTok in the United States if a deal isn’t reached by September 15.)

So is TikTok a potential boon for Microsoft? Or another example of a non-core acquisition that isn’t properly planned for and executed and end up as a failure? Not all acquisitions should be integrated—sometimes keeping the acquired company standalone makes more sense. In these two cases, though, we see a compelling need for true integration. 

Top 5 lessons from West Monroe’s M&A experience to avoid acquisition failures 

Avoiding acquisition failures, in our experience, comes down to five things—all of which should be evaluated during the diligence process and carefully planned for when it comes to integration.  

1. Combining sales and customer engagement channels

Pay attention to how customer engagement channels can reinforce each other. And make it easy: Customers will have inertia due to prior brand loyalty or unfamiliarity interacting with you in a new channel. Don’t put too much focus on cost synergies and remember a 1% increase in revenue can offset 25% missed synergies.  

2. Culture differences are real and can’t be ignored

In our experience culture can be a great inhibitor to realizing real, financial value. Cultures that are too far apart will slow and even prevent integration—the more that integration is key to the investment thesis, the more important culture becomes in evaluating an acquisition. In either case, valuable talent should be proactively engaged and retained to mitigate attrition.  

3. Have realistic synergy expectations

Some customers will bail or never materialize as cross-channel revenue. That’s OK—you just need to manage expectations (and earn-outs) accordingly. Also, don’t just outline what can be integrated but what you will actually integrate—how and when. If the integration strategy is light on cost savings and synergies, then balance that with top-line growth. Under Armour’s biggest failure was the attitude of “just wanting technology.” Tech for tech’s sake rarely ever creates value, which is what happened to Under Armour.   

4. Don’t overestimate your own ability to integrate

Integrating is the hard part, even more so doing it across business models that you know little or nothing about. All the modeling and impressive future financial projections are a waste if you can’t execute the integration properly. Integration can go faster and much smoother when you use an outside expert to drive the timeline, leverage best practices, and act as a neutral party between the two companies.  

5. Create a combined leadership team

Organizations drive results through accountability. Having clear and properly aligned leaders to drive the company toward its targets is the foundation to success. For example, in the Under Armour situation, aligning the product leaders with Under Armour’s various commercial leaders to determine the go-to-market plan for each product—and then defining who is accountable for driving results—would establish a good starting point.  

Conclusion  

The list of failed acquisitions is long—and remember, behind every public failed acquisition are dozens of others in the private, lower and middle markets. Even when an acquisition doesn’t fail, most don’t meet their original expectations.  

Acquiring a non-core asset can be a valuable growth strategy for companies that want to enter new markets, gain new customers, acquire sought-after talent, access new technology, and more. Remember, Under Armour wanted to become more digital. And Microsoft is seeking a new competitive edge. Neither of these are improper pursuits. The bottom line? The devil—and M&A value—is in the details.