The fact that 50 to 70 percent of mergers fail to add any value to the companies involved begs the question: Why do senior management and stockholders pursue this course of action?
That very question led me to spend five years diligently examining the issues for my new book “M&A: How to Align Managerial Strategy to Post Transaction Value.”
As the director of graduate business programs for the Malcolm Baldrige School of Business at Post University and 27 years of experience in manufacturing in a number of marketing and finance positions, I believe analyzing why companies proceed with mergers and acquisitions is vitally important.
Why? It’s important to hold the business managers accountable for their decisions. Business managers must also communicate publicly their intentions for seeking a merger and acquisition plan.
The results unearthed are startling.
After reviewing reams of financial documents surrounding numerous mergers and acquisitions, I was puzzled to discover that very few organizations even stated a specific reason why they sought that strategy in the first place.
I think they just assume it’s going to be good for the company, but in reality it’s bad for them.
So, based on my research and professional experience, here are a few takeaways for companies on what to do before even considering a merger and acquisition plan.
First and foremost: Align the Goals: Setting measurable goals is paramount to determining whether a merger is successful. You must align the goals with accounting measures that are quantifiable, then publish those goals. Doing so, allows you to tie management’s compensation and employment to their success is meeting stated goals.
In my professional career I’ve heard so many bizarre reasons for why companies merge. In one case, a company bought another one so the chief executive officer could be closer to his daughter’s college. That was the sole basis for the company’s acquisition.
In my research I found there are four main reasons to pursue a merger and acquisition of a company. They are: 1. Synergy, 2. Market power, 3. Market discipline, and 4. Diversification.
- Synergy: Companies consolidate duplicate operations therefore saving significant expense.
- Market power: A merger may make sense if a company can acquire a larger piece of the market.
- Market discipline: A company may be ripe for a merger if it’s being managed poorly, and there is the potential for someone from the outside to come in and manage it properly. There is the potential for a turnaround investment.
- Diversification: This is important especially if acquiring a company allows you to get into a whole new field of business.
Even if all these opportunities are present, mergers and acquisitions still fail. The most catastrophic merger to date was Time Warner’s $182 billion acquisition of AOL, which destroyed more than $60 billion in shareholder value. Time Warner looked at AOL as a pipeline to the Internet, but two things doomed the acquisition.
- Other internet search engines including Google and Bing surpassed AOL’s popularity.
- Time Warner couldn’t figure out how to monetize the content on its sites. Ten years ago people were not interested in paying to read content online.
While the Time Warner merger may be the biggest failure, it’s hard to find one that has really paid dividends. The closest is the ExxonMobil merger, which gave the combined company a larger share of the overall oil market. The companies merged in 1999 and at the time the deal was worth $82 billion. Currently, the company is the world’s third largest by revenue.
It’s my hope that my book will inspire the public to better pay attention to mergers and acquisitions, and demand accountability when they are not successful.
It’s amazing how many failed chief executive officers keep their jobs.