FROM THE INSTITUTE
FOR COLLABORATIVE ALLIANCES...
HOW MERGERS GO WRONG
The Economics,
July 22nd, 2000
A stream of studies has shown that corporate mergers have even higher failure rates than the liaisons of Hollywood stars. One report by KPMG, a consultancy, concluded that over half of them had destroyed shareholder value, and a further third had made no discernible difference. Yet over the past two years, companies around the globe have jumped into bed with each other on an unprecedented scale. In 1999 the worldwide value of mergers and acquisitions rose by over a third to more than $3.4 trillion. In Europe, the hottest merger zone of all, the value of deals more than doubled, to $1.2 trillion.
Few failures are on the scale
of AT$T's 1991 purchase of NCR, the second-largest acquisition
in the computer industry, which was reversed after years of immense
loses. But none has gone entirely smoothly either; and all offer
useful insights.
Most of the mergers are defensive, meaning that they were initiated
in part because the companies involved were under threat. Sometimes,
the threat was a change in the size or nature of a particular
market: McDonnell Douglas merged with Boeing, for example, because
its biggest customer, the Pentagon, was cutting spending by half.
Occasionally the threat lay in globalization and its demand for
greater scale: Chrysler merged with Daimler-Benz because, even
as number three in the world's largest car market, it was too
small to prosper alone.
When a company merges to escape a threat, it often imports its
problems into the marriage. Its new mate may find it easier to
see the opportunities than the challenges.
As important as the need for clear vision and due diligence before
a merger is a clear strategy after it. As every employee knows,
mergers tend to mean job losses. No sooner is the announcement
out than the most marketable and valuable members of staff send
out their resumes. Unless they learn quickly that the deal will
give them opportunities they will be gone, often taking a big
chunk of shareholder value with them.
The mergers that worked relatively well were those where managers
both had a sensible strategy and set about implementing it immediately.
The Daimler Chrysler merger integration was pursued with great
thoroughness-although not skillfully enough to avoid the loss
of several key people. After Citibank merged with Travelers to
form Citigroup, the world's biggest financial-services firm, it
quickly reaped big profits from cost-cutting rather than cross-selling
different financial services to customers.
Luck and the economic background play a big part. Merging in an
upswing is easier to do, as rising share prices allow bidders
to finance deals with their own money, and it is also easier to
reap rewards when economies are growing. But companies, like people,
can make their own luck: Boeing's Phantom Works, an in-house think-tank
that speeded up their integration process developed new products
and refocused the company on its diverse customers, was a serendipitous
creation in the turmoil that followed its deal with McDonnell
Douglas.
Above all, personal chemistry matters every bit as much in mergers
as it does in marriage. It matters most at the top. No company
can have two bosses for long. So one boss must accept a less important
role with good grace. It helps if a boss has a financial interest
in making the merger work. Without leadership from the top, a
company that is being bought can all too often feel like a defeated
army in an occupied land, and will wage guerrilla warfare against
a deal.
The fact that mergers so often fail is not, of itself, a reason
for companies to avoid them altogether. But it does mean that
merging is never going to be a simple solution to a company's
problems. And it also suggests that it would be a good idea, before
they book their weddings, if executives boned up on the experiences
of those who have gone before them.
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