Why most mergers and acquisitions fail to achieve objectives

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)

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 connections due to financial constraints within the company." (Dumon, 2008) At that time the leaders in dial-up Internet service was AOL and Time Warner was pursued for its cable division since high-sped broadband connection was the future preferred application. As AOL dial-up subscribers fell, it is reported that Time Warner "stuck to Road Runner Internet service provider rather than market AOL. With their consolidated channels and business units, the combined company also did not execute on converged content of mass media and the Internet. Additionally, AOL executives realized that their know-how in the Internet sector did not translate to capabilities in running a mediaconglomerate with 90,000 employees." (Dumon, 2008) Dumon (2008) states that the "…politicized and turf-protecting culture of Time Warner made realizing anticipated synergies that much more difficult. In 2003, amidst internal animosity and external embarrassment, the company dropped "AOL" from its name and simply became known as Time Warner." (Dumon, 2008)

Dumon (2008) additionally reports the failure of the merger between Sprint and Nextel stating that Sprint acquired a majority stake in Nextel Communications in August 2005 in what was a "$35 million stock purchase" and which combined the two "to become the third largest telecommunications provider." (Dumon, 2008) Before the merger, it is reported that Sprint "catered to the traditional consumer market, providing long-distance and local phone connections and wireless offerings." (Dumon, 2008) Dumon (2008) states that Nextel "had a strong following from businesses, infrastructure and employees and the transportation and logistics markets, primarily due to the press-and-talk features of its phones." (Dumon, 2008) This merger allowed Sprint and Nextel to gain access to each other's base of customers and hoped that the companies would grow through "cross-selling their product and service offerings." (Dumon, 2008) Immediately after the merger it is reported that Nextel executives and mid-level management left Nextel en masses due to cultural differences and a stated incompatibility as "Sprit was bureaucratic and Nextel was entrepreneurial" and specifically that Nextel was "more attuned to customer concerns" and Sprints reputation in customer services was "horrendous." (Dumon, 2008) In fact, Sprints' churn rate was stated to be the highest in the industry. (Dumon, 2008) Failure of the company to deliver on this "critical success factor and loss market share" are the reasons for the failure of the merger of Sprint and Nextel along with cultural problems including what is stated to be "exacerbated integration problems between the various business functions." (Dumon, 2008)

Dumon reports that there was a requirement of smooth integration between Sprint and Nextel due to the "…technological dynamics of the wireless and Internet connections" however, it is stated that Nextel was "…simply too big and too different for a successful combination with Sprint." (2008) Additionally, it is reported that the competitive pressures from AT&T on Sprint were stiff and "…with the decline of cash from operations and with high capital expenditure requirements, the company undertook cost-cutting measures and laid off employees. In 2008, the company wrote off an astonishing $30 billion in one-time charges due to impairment to goodwill, and its stock was given a junk status rating. With a $35 billion price tag, the merger clearly did not pay off.

Summary and Conclusion

The literature reviewed in this study has stated various reasons that mergers fail which may include such as cultural issues within the organization, failure of planning, failure to properly train and prepare employees and other critical success factors that are not addressed by companies involved in mergers. Mergers require careful planning and analysis and without planning and analysis the risk for merger failure are extremely high.