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Cover Story

A Modern Hype called Mergers & Acquisitions!
Prof. Bill Kaufmann, Faculty of M&A Integration, College of William & Mary's Mason School of Business and at Sum COX School of Business, Writes about why M&As can go bad, and why 75% of them actually Destroy Shareholder value for the acquirers. Co-Ordinated
Issue Date - 18/08/2011
During the past 40 years, I have been part of the merger and acquisition world in many different ways – both as an acquirer many times over, then being acquired once, plus teaching M&A Integration for the College of William & Mary’s Mason School of Business and at SMU Cox School of Business at the MBA level. Let me outline what I have observed and learned over the years.

You can name a hundred reasons why M&As don’t or cannot work. I can name some going by what I have seen in first person. Here they are: (1) Inadequate due diligence: When too much emphasis is on the numbers and not other factors. One example is that of cultural synergy. Often you would find that in M&As which have failed, the acquirers have failed to integrate the cultures of the two companies. Daimler Chrysler was a good example of this. Conflicting corporate cultures is perhaps the most destructive of all the reasons why two companies don’t “fit”; (2) Lack of a compelling strategic rationale: The key word is compelling. As I mentioned before, some companies go ahead for an acquisition or a merger even if they find no real strategic sense in the deal. This is not right; (3) Unrealistic expectations of synergies: Top management oversells the value of the combination. And the acquiring firm ends up paying too high a premium, often much more than can be achieved through various synergies. Paying too much is a problem, and this happens especially when there is a bidding war between two egos; and (4) Failure to move quickly enough to meld the two companies: This creates uncertainty in the workforce.

The new company that is now before you is a new company. So it has to be treated differently. Here are the reasons why: (1) Turnaround candidates: Sometime you realise that the company with which you are shaking hands is – crudely stated – a loser. What do you then? You have to believe that you can turn it around and make it a winner; (2) Future acquisitions: Just because you spend money on one does not mean that you may not enter into another inorganic deal. Prepare for the next one; (3) Accelerated growth: In order to achieve synergies and grow fast, the combined entity actually has to act like a combine. You can’t grow if you are fragmented; You’ll need new strategies for your new business model; and (5) New markets, products, distribution, customers: Optimising the new organisation and it’s value is critical. Post-merger or post-acquisition, you are no longer the same old company. Your entire business is now “new”! Remember, your competition isn’t going to wait for you to get organised. So you should take as little time as possible to get your soldiers in line!

My experiences and some studies show that 50% or more of upper-middle management and above will be replaced or eliminated, if acquired. There will be consolidation of locations. Operations close, people move, terminations and disruptions occur. This is inevitable. Workers need to be prepared for at least 10% of job loss at the acquired company after the integration is complete. Worse, 75% of M&As fail to achieve their “stated” communicated objectives prior to the event and many acquisitions fail to increase shareholder value and most actually reduce value short term.

It’s much more fun being the acquirer than being acquired. But my observation is that no matter which side of the merger or acquisition you’re on, few people including senior management are asking the question, “What’s in the best interests of the combined companies?” Instead, the question seems to be, “What’s in it for me, how do I come out on top and what do I have to do to survive?”

Be careful what you wish for in the name of M&A. You may lose it all!


Karan Arora           

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