Failure of Mergers Essay

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  • Subject: Business
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Failures of Merger

Failure of Mergers

The objective of this study is to examine why it is that most mergers fail and will provide real-life examples of the failure of mergers. Toward this end, this work will examine relevant literature in this area of study and specifically academic and professional literature and publications that are peer-reviewed in nature. The work of Weber and Camerer (2003 ) entitled "Cultural Conflict and Merger Failure: An Experimental Approach" reports that most mergers fail and that failure occur "on average in every sense: acquiring firm stock prices tend to slightly fail when mergers are announced; many acquired companies are later sold off; and profitability of the acquired firm is lower after the merger." (Weber and Camerer, 2003) There is a great deal of conflict reported during the process of a merger that results in a high rate of turnover." Disappointment was expressed by participants in the results of the merger. Widespread merger failure is reported to be "at odds with the public and media perceptions that mergers are grand things that are almost sure to create enormous business synergies that are good for employees, stockholders, and consumers." (Weber and Camerer, 2003) Participants are stated to express disappointment at the results and surprise at the outcome. (Weber and Camerer, 2003)

I. Mergers and Acquisition Failures are Project Management Failures

Elwin (2010) in the work entitled "Mergers and Acquisitions are Project Management Failures" states that projects "are how organizations realize their strategies." (Elwin, 2010) The goal of a merger may be one or a combination of: (1) new technology; (2) new market; (3) increase in customers; (4) foreign direct investment; and (5) tax gains. (Elwin, 2010) The objective of a merger or acquisition is to: (1) increase shareholder value; (2) create firm value; (3) cost reduction; (4) increased productivity; (5) revenue growth; (6) strategic benefit; (7) market gain; (8) complementary resources; (9) vertical integration; and (10) reduce cost of capital. (Elwin, 2010) The rates for project failure stated by Elwin (2010) in mergers and acquisitions and stated for example is that in a survey of "more than 400 U.S. And European corporate executives published by Accenture, 55% of executives said that their most recent deals did not achieve expected cost-saving synergies." (Elwin, 2010) Elwin additionally reports that a McKinsey study states findings that in 70% of the deals studied "the buyer failed to achieve the expected levels of revenue synergies." (2010) Elwin reports that according to McKinsey study "61% of all acquisition programs were failures because the acquisition strategies did not earn a sufficient return on the funds invested. (Elwin, 2010) According to Carleton (1997) "between 55% to 70% of mergers and acquisitions fail to meet their anticipated purpose." (Elwin, 2010) In addition, a 2007 study reported by the Hay Group and the Sorbonne states findings that 97% of mergers in the UK "fail to achieve original strategic objectives." (Elwin, 2010) Sources in the United States are stated to "place merger failure rates as high as 80% and evidence indicates that around half of mergers fail to meet financial expectations." (Elwin, 2010)

II. Five Major Barriers to Success in Mergers and Acquisitions

Elwin reports that there are five major barriers to success in mergers and acquisitions as follows:

Inability to sustain financial performance (64%)

Loss of productivity (62%)

Incompatible cultures (56%)

Loss of key talent (53%)

Clash of management styles (53%)

III. Giffin and Schmidt (2002) -- 7 Major Reasons for Merger Failure

The work of Giffin and Schmidt (2002) reports that reasons for failures of mergers include such as the following: (1) failure of management to agree on company's future direction; (2) organizational paralyzed by uncertainty; (3) departure of key employees and defection of customers; (4) clash of cultures; and (5) failure of employees to understand what was expected by the new company resulting in morale plummeting. (Giffin and Schmidt, 2002) Giffin and Schmidt (2002) report that in a survey of approximately 450 HR executives from large companies that were involved in mergers, acquisitions or joint ventures and which sought to determine the primary obstacles to the success of mergers and acquisitions the top obstacles stated included those listed in the following chart with accompanying percentages.

Figure 1

Top Seven Reasons for Failure of Mergers

Source: Giffin and Schmidt (2002)

IV. Due Diligence

The work of Chiriac (2011) entitled "Mergers -- Success or Failure?" reports that mergers decision id dependent "on the outcome of due diligence." It is necessary to take the following warning signs into account in order to ensure the merger success:

(1) Financial warning signs which include termination of collaboration with internal/external auditors, changes in accounting methods, sales of shares by sources inside the company management, employees. These actions may indicate fraud and/or possible insolvency;

(2) Warning signals from the operations area, which covers, among other, the turnover is very high or very low and may indicate instability in the company's activity;

(3) Warning signals on debt, which are related to the company's exposure to potential dispute with State bodies, customers, employees;

(4) Warning signals about the transaction itself, which may relate to potential violations of law resulting from the transaction or tax and accounting objectives diverge on the transaction. (Chiriac, 2011)

Due diligence analysis is "a detailed analysis of the company being acquired in regards to financial managements and assets." (Chiriac, 2011) Issues examined during the due diligence process include: (1) reviewing financial statements; (2) review and management aspects and the company activity in order to make a determination of the quality and reliability that may be made to understand financial statements and any rights and obligations contingent, whose impact is not reflected in the financial statements; (3) review of the degree of conformity with legal regulations for checking the potential of unpleasant future juridical implications arising from the past activities of the company; (4) review of transactions and documents to ensure adequate documentation of and that the transactions is appropriate to transaction structure; and (5) fiscal review. (Chiriac, 2011)

V. Gadiesh and Ormiston (2002) -- Five Reasons for Merger Failure

The study conducted by Gadiesh and Ormiston (2002) states that the five primary reasons for merger failure are those as follows:

(1) Poor strategic rationale;

(2) Mismatch of cultures;

(3) Difficulties in communicating and leading the organization;

(4) Poor integration planning and execution; and (5) Paying too much for the target company. (in: McDonald, Coulthard and de Lange, 2003)

Stated as factors included in the primary reasons for failures of mergers are the following factors:

(1) Disproportionate quality;

(2) Size problem;

(3) Insufficient research;

(4) Diversification;

(5) Earlier Acquisition Knowledge;

(6) Ungainly and unproductive;

(7) Diversity in Culture

(8) Reduced Organization Fit;

(9) Underprivileged planned Fit;

(10) Determined towards bigness;

(11) Imperfect assessment;

(12) Poorly supervised incorporation;

(13) Breakdown to take abrupt control;

(14) Curtailed and insufficient due carelessness;

(15) Ego clash;

(16) Merger between equals;

(17) Over leverage;

(18) Inappropriateness of partners;

(19) Imperfect focus;

(20) Inadequate communication;

(21) Failure in exhibiting the role of leadership. (Edu Workers, UK, nd)

VI. Cross-Cultural and Consultancy a Reason for Merger Failure

The work entitled "Cross Border Mergers & Acquisitions: Reducing the Risk of Failure" reports that cross-cultural and consultancy can significantly increase success rates of mergers. Targeted training and consultancy services assist the merger process through:

(1) Development of the intercultural competency of staff;

(2) Managing culture change more efficiently;

(3) Acceleration of the M&A process, particularly past M&A integration;

(4) Reduction of the risk of misunderstanding and frustrations;

(5) Increasing trust and well being across all parties involved;

(6) Speed up effective communication;

(7) Improving client and supplier satisfaction;

(8) Decreasing employee disengagement and attrition;

(9) Diminishing direct financial losses; and (10) Avoiding potential failure of the merger and loss of business and reputation. (Communicaid, nd)

Post-Transaction training and support to support the success of the merger includes the following:

(1) Cultural change management;

(2) Cross-cultural leadership;

(3) Cross-cultural team building;

(4) Organizational values workshops;

(5) Communications planning

(6) Executive coaching;

(7) Effective matrix management;

(8) Managing virtual teams;

(9) Individual psychometric profiling;

(10) Business language training. (Communicaid, nd)

VII. Examples of Merger Failure

The work of Dumon (2008) entitled "Biggest Merger and Acquisition Disaster" states that the most prominent merger failure in history is likely that of AOL and Time Warner. The present company is reported to be a combination of three primary business units which included Warner Communications who merged with Time, Inc. In 1990 and in 2001, America Online acquired Time Warner in a megamerger for $165 billion" stated as the largest business combination up until that time. (Dumon, 2008) Following the megamerger it is reported that the "dot-com bubble burst, which caused a significant reduction in the value of the company's AOL division" with a reported loss of $99 billion reported. (Dumon, 2008) At the same time, it is reported "the race to capture revenue from Internet search-based advertising was heating up. AOL missed out on these and other opportunities, such as the emergency of higher-bandwidth…

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