Adapted from Dr. Claes Fornell's book | July 05, 2018
The Satisfied Customer: Winners and Losers in the Battle for Buyer Preference

One reason acquisitions fail to generate shareholder wealth is that they often leave customers worse off.

Mergers and acquisitions can be an instant shot in the arm to pump up the kind of immediate growth that gets Wall Street excited. Having trouble growing your firm? Looking for cost efficiencies to be found in economies of scale? Are customers defecting to competition and earnings beginning to suffer? Not to worry, just buy those customers back by acquiring the competition.

There's just one problem: many acquisitions fail, and, as a result, firms end up losing the very shareholders they seek to please, destroying wealth in the process.

One reason most acquisitions fail to generate shareholder wealth is that they often leave customers worse off. Our data show that customer satisfaction and shareholder value generally go together. Satisfied customers tend to provide more repeat business and generate a stable income stream. In terms of both revenue and profit, most of this stream comes from repeat business and repeat business is highly dependent on having satisfied customers.

Why does the customer relationship suffer in the wake of many mergers and acquisitions? There are several reasons:

• Cust-cutting and streamlining leading to fewer alternatives, whether brands or retail outlets;
• Cost efficiencies that reduce customer service;
• Difficulties in coordinating and working together; and
• Not understanding the customers of the acquired company.

All this is not to suggest that mergers are always bad for shareholders because deteriorating customer relationships and lower customer asset values. Sometimes they work. Banks seem to have figured out how. It’s not that difficult, at least not in principle.

First, be realistic. How will the balance sheet look in terms of return on invested capital? Capital invested goes up, often dramatically, so even if profit follows, it may be an expensive proposition in terms of return on capital.

Second, look beyond the balance sheet and consider the implications for value of the customer relationships. Very little effort seems to have been made in this regard. Millions of dollars are spent to determine the value of target companies. I have yet to see any comprehensive analysis about the value of customer assets or the impact of this value after the acquisition.

Curiously enough, mergers often take place between firms that don’t have very high customer satisfaction, or when the target company has weak customer relationships. In both situations, the value of the combined customer asset will suffer, sometimes for years after the deal.

CFI Group offers expertise in designing customer satisfaction experience measurement solutions that help you manage customer relationships. Contact us for more information on how we can help you assess M&A impact on customer assets.

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