FREE online courses on Mergers & Acquisitions - Chapter 1 - A Reality Check

 

As mentioned at the start of this course, mergers and acquisitions are extremely difficult. Expected synergy values may not be realized and therefore, the merger is considered a failure. Some of the reasons behind failed mergers are:

 

• Poor strategic fit - The two companies have strategies and objectives that are too different and they conflict with one another.
• Cultural and Social Differences - It has been said that most problems can be traced to "people problems." If the two companies have wide differences in cultures, then synergy values can be very elusive.
• Incomplete and Inadequate Due Diligence - Due diligence is the "watchdog" within the M & A Process. If you fail to let the watchdog do his job, you are in for some serious problems within the M & A Process.
• Poorly Managed Integration - The integration of two companies requires a very high level of quality management. In the words of one CEO, "give me some people who know the drill." Integration is often poorly managed with little planning and design. As a result, implementation fails.
• Paying too Much - In today's merger frenzy world, it is not unusual for the acquiring company to pay a premium for the Target Company. Premiums are paid based on expectations of synergies. However, if synergies are not realized, then the premium paid to acquire the target is never recouped.
• Overly Optimistic - If the acquiring company is too optimistic in its projections about the Target Company, then bad decisions will be made within the M & A Process. An overly optimistic forecast or conclusion about a critical issue can lead to a failed merger.

 

The above list is by no means complete. As we learn more about the M & A Process, we will discover that the M & A Process can be riddled with all kinds of problems, ranging from organizational resistance to loss of customers and key personnel.

 

We should also recognize some cold hard facts about mergers and acquisitions:

 

• Synergies projected for M & A's are not achieved in 70% of cases.
• Just 23% of all M & A's will earn their cost of capital.
• In the first six months of a merger, productivity may fall by as much as 50%.
• The average financial performance of a newly merged company is graded as C - by the respective Managers.
• In acquired companies, 47% of the executives will leave the first year and 75% will leave within the first three years of the merger.

 

In the book Valuation: Measuring and Managing the Value of Companies, the authors note the following:

 

"Even in situations where the acquired company is in the same line of business as the acquirer and is small enough to allow for easy post-merger integration, the likelihood of success is only about 50%."

 

Do not despair - there is some good news in all of this! The success rate in recent years has improved dramatically. As more and more companies gain experience in the M & A process, they are becoming very successful. In 1997, Mercer Management Consulting released a study which showed that mergers during the 1990's substantially outperformed mergers during the 1980's.

 

So let us move on and see if we can better understand the nuts and bolts behind mergers and acquisitions.