Why Many High-Value M&As Fail

Corporate mergers and acquisitions (M&A) are vital in shaping the dynamic business landscape globally. Successful M&As create lasting shareholder value while poorly executed ones eventually erode value for all stakeholders in the long term. This impact on value creation is notably compounded in the case of high-value deals and a significant number of such transactions ultimately fail to achieve this intended goal of value-creation.

Ironic, as it may sound, transactions involving very high stakes often flounder on fundamental aspects. Ill-conceived and ill-implemented deal strategies frequently result in key personnel leaving, conflicts among teams, or a decline in motivation within the acquired company. By and large, the reasons for failure typically fall under one or more of these broad categories – Inadequate Pre-Merger Due Diligence, Failed Synergies (specifically unrealistic expectations), and Post Merger Integration challenges including cultural hurdles. While many companies have established standardized processes for activities such as target search, due diligence, and valuation methods, a 2015 BCG survey revealed less than 40% of companies have a standardized approach to post-merger integration (PMI). And often, the PMI process crumbles even when the acquisition checks all the other boxes.

Post Merger Integration – Cultural Hurdles & Execution Challenges

Effective post-merger integration requires meticulous planning, coordination, and execution. Poor execution and integration missteps can derail anticipated synergies and consequent value creation. Historically, failed M&As with the highest value erosion have had one common thread – the substantial cultural differences between the two involved entities. Cultural integration is extremely crucial, but to the detriment of such deals, often overlooked. When companies with contrasting organizational cultures merge, conflicts are bound to arise, affecting employee morale, productivity, and customer satisfaction.

AOL – Time Warner (2001, $165bn) is perhaps the most pertinent example highlighting the significance of Cultural Challenges in mergers. Although there were other reasons which piled up, the way both companies operated were worlds apart and contributed hugely to the failure. Amongst others, a fundamental approach to the deal was starkly different between the two entities. Business units at Time Warner were built to run independently and approached the deal with a longer-term view, while AOL came onboard with a quick profit-driven approach focused only on short-term goals. In the words of Time Warner’s former CEO, Dick Parsons, “The business model sort of collapsed under us…it was beyond certainly my abilities to figure out how to blend the old media and the new media culture. They were like different species, and in fact, they were species that were inherently at war.”

The Daimler-Chrysler merger (1998, $36bn), where the clashes between the hierarchical German culture and the entrepreneurial American culture, ultimately resulted in the dissolution of the partnership. The Alcatel – Lucent (2006, $13bn) acquisition is a unique case of language barriers and cultural clashes. Lucent executives (USA-based) found it hard to adapt to Alcatel’s corporate culture (France-based). The company was finally split later in 2014.

Viacom–CBS merger (1999, $35bn) and Google–Motorola acquisition (2012, $12.5bn) are good examples where operational challenges arose after the deals were closed. Even after Google acquired Motorola, it failed to produce quality mobile handsets and contracted Samsung and LG to develop its Nexus brand. The Kmart – Sears (2004, $11bn) deal tanked as the two failing companies failed to operate as a single entity.

Pre-Merger Due Diligence

A study by KPMG found that 56% of M&A deals failed due to insufficient due diligence, and high-value transactions are no different. Inadequate assessment of financials, market conditions, regulatory compliance, and potential legal issues can lead to costly surprises after the deal is closed.

The Hewlett-Packard (HP) and Autonomy merger (2011, $8.8bn) is an example of inadequate assessment of financials. HP failed to identify irregularities in Autonomy’s financial statements. Price paid for the assets can also determine the chances of success in an acquisition. Another case in point is Quaker Oats Co. buying Snapple Beverage Corp. in 1994 for $1.7bn and selling it off after 27 months for $300mn. Investors argued that Quaker paid $1bn more than what Snapple was worth. Ford bought Jaguar (1989, $2.5bn) and Land Rover (2000, $2.7bn) but sold it off to Tata Motors (2008, $2.3bn). Ford clearly paid more for the brands, but Tata turned the JLR brand around despite cultural challenges. The acquisition price too proved to be just right for Tata.

Similarly, the Microsoft–Nokia and BoA–Countrywide deals tanked due to poorly executed due diligence.

Failed Synergies – Unrealistic Expectations

Every M&A is set out with one fundamental objective – to reap the benefits from synergies at all possible levels. Organizations often overestimate potential synergies and cost savings resulting from a deal. In a 2014 Bain & Company survey of global executives, nearly 70% cited overestimating synergies as one of the key reasons for M&A failure. This premise extends to high-value deals as well.

Mattel (Barbie dolls) Toy Company acquired Learning Company (1998, $3.8bn) sensing a move away from traditional toys towards video game consoles. Mattel felt that the Learning Company would provide a software platform to build upon, but two years later Learning Company was sold with no strategy, no products, and no synergies to showcase from the acquisition. On similar lines, the eBay – Skype (2005, $2.6bn) deal ended up being a fiasco because eBay expected buyers and sellers to interact over Skype’s video platform, without realizing that buyers preferred anonymity.

While high-value corporate M&As hold great potential for growth and value creation, careful planning, realistic expectations, cultural alignment, due diligence, and effective execution are imperative to avoid costly failures. By understanding the common reasons behind M&A failures and implementing appropriate strategies, organizations can mitigate risks, increase the likelihood of successful integrations, and achieve their desired outcome in today’s dynamic business landscape.

Author: Shivam Agarwal

Assistant Consultant, Strategy Consulting

Image courtesy: CIO Bulletin