Join Tim Galpin for an in-depth discussion in this video Identifying why M&As fail, part of Mergers and Acquisitions Foundations (2014).
- Does this sound familiar? "Another merger was announced today. "This morning, [Your Company] announced an initial agreement "to merge with an industry rival. "During a joint press conference, the two companies' CEO's "described the combination as a true merger of equals." The two went on to state that, "It's too early in the deal to begin planning "for integration, but we are confident that the new company "will be stronger together "than either company could be on its own." Announcements like this have appeared in the business media so frequently for the past few decades, that mergers and acquisitions have become part of daily business.
Although things may sound good on paper, ultimately for a merger acquisition to be considered a success, the New Company, also known as the "NewCo", must increase shareholder value faster than if the companies remained separate. However, in spite of continued high deal volumes, most M&A's still fail to accomplish the objective so optimistically projected in the initial announcements. In fact, most research has found that M&A's have excessively high failure rates.
For example, a study by the accounting firm, KPMG, found that 83 percent of deals did not boost shareholder returns. Another study by the consulting firm, A.T. Kearney, found that total returns on M&A were actually negative. Finally, a study conducted by the Canadian Financial Executives Research Foundation found that only 20 percent of finance executives who had been involved in a merger acquisition said their transactions were very successful.
There are some well-known examples of the high potential for failure of M&A's. Such as Hewlett-Packard's acquisition of Compaq. The day before the announcement, HP stock price was $23.11. After the announcement, HP's stock dropped to $18.87, and stayed pretty much at that same level for the following three years. Down over 19 percent from its pre-acquisition selling price. Likewise, in 1994, Quaker Oats acquired Snapple Beverage.
This proved to be one of the most ill-fated M&A deals in corporate history. Quaker's strength in super markets and mass distribution was a poor match with Snapple's convenience store market. The new owners of Snapple replaced a popular ad campaign with new marketing programs that immediately flopped. In addition, Wall Street considered Snapple's purchase price to have been about one billion dollars too high. All these factors and more resulted in 1.4 billion dollar loss in just 27 months.
That's 1.6 million dollars for every day that Quaker owned Snapple. Cases such as these are sensational and garner a great deal of public attention. Yet, smaller firms are not exempt from M&A problems. It's easy to assume that the smaller companies with flatter structures would have an easier path to emanate success. Yet, this is not the case. Poor M&A performance is prevalent across the board from small through large firms.
In fact, M&A's rank above business start ups as the most risky business undertaking. According to CBS MoneyWatch, over 80 percent of M&A's result in no or negative shareholder returns. While 75 percent of new businesses do not survive more than five years. Beyond all the optimistic press announcements about mergers and acquisitions, real organizations are being disrupted, real employees are being displaced, and real shareholders are being disappointed.
Not for lack of effort, but largely for lack of effective and efficient integration planning and execution. In my experience, I found several key factors that have a high impact on M&A outcome. These include: communication, timely and effective decision making, cultural integration, planning and execution, managerial behaviors, and finally, staffing and selection. Organizations often know the root causes of failed M&A's.
But in my experience, firms still do a poor job of managing the issues involved in achieving positive M&A outcomes. So, now that you can see the extraordinary risk M&A's present to organizations, I want you to take a few minutes to assess your own organization's M&A experience and capabilities. You may want to assess the entire organization, or just your part of it: your division, function, or department, for example. Here are five questions you can use to conduct your assessment.
How many deals have you completed in the past five years? Based on the intended goals of each deal, on a scale of one being terrible to 10 being outstanding, how successful were those transactions? Based on the key deal success factors I discussed previously, what did your organization do well during each of those transactions? What could have been done better during each deal? Again, on a scale of one being terrible, to 10 being outstanding, how ready do you feel your organization is to conduct successful transactions in the future?