Perhaps because of the extraordinarily high estimate of close to a 90% failure rate, there has been much commentary on the reasons behind the high risk of failure for mergers and acquisitions (Price, 2012). Although the 90% figure may have more to do with the way the researcher is defining failure than with any real measure of business risk, it remains that there is a significant possibility for merger and acquisition deals to go poorly. One effective way to examine key reasons for this involves examining decision points over time during the merger and acquisition process. At each step in the process it is possible to find errors that play into ultimate failure of these types of business deals (Rankine, 2001).
A threshold issue is the presence of misguided business logic at the onset of the deal. This is commonly shown several ways including poor strategic fit between the two companies (Price, 2012) or a lack of recognition that merger of unequals generally works more often than merger of equals (Rein, 2010). However, this idea can be negative if taken to its extreme, as in the case of acquirer being driven by opportunism rather than business growth motivations (Rankine, 2001). A series of mergers that exemplify this issue is the acquisitions of ITT during the 1980s and 1990s. Once involved in businesses as dissimilar as hotels and pumps the company struggled to get value out of its move into these areas (Rankine, 2001).
Errors in understanding the new business can affect the probability of success of a merger or acquisition. This can be shown in failure to understand the new company’s market or the new company’s culture (Rankine, 2001; Price, 2012). But perhaps the most preventable failure in this area are problems that should have been but were not identified during the due diligence process (Siegenthaler, 2010). The relatively recent acquisition of the generic pharmaceutical manufacturer Ranbaxy by the Japanese pharmaceutical company Daiichi Sankyo (Miller, 2011) is a prime example of this. In this case, a more careful look at the manufacturing problems that were present and evident well before the merger might have avoided Daiichi’s current involvement in the subsequent Food and Drug Administration (FDA) actions including closure of facilities, export bans, and fines of $500 and $150 million (Miller, 2011).
One further stage where issues in merger and acquisitions can arise is during the deal management. A prime problem in this time period is the basic issue of paying too much (Rankine, 2001). There are many examples of companies getting caught up in the excitement of the deal and paying a premium not justified, especially when looked at in retrospect. Deal structures can also be misguided, such as tying key future payments in the price, termed holdbacks, to actions that are in reality performed by employees who originate from the buying company (Price, 2012). The resulting conflicts can be a primary reason for the future failure of a deal, showing the need to carefully craft such structures if full upfront payment is not used.
Mergers and acquisitions also can fail due to decisions at the integration management stage of the deal. Commentators are universal in their emphasis on proper communication by the acquiring company at this time (Rankine, 2001; Siegenthaler, 2010; Price, 2012; Rein, 2010). In particular, fault is found in both the clarity and the frequency of communications with the acquisition company (Price, 2012). Another key element of this stage of the process is the requirement for strong leadership. The merger between Travellers and Citicorp in 1998, where the two CEOs attempted to share the leadership position, is a prime example of a failure due, at least in part, to this issue (Rankine, 2001).
Finally, flaws can occur during the corporate development of the merged companies that bring about the ultimate failure of the deal. An often-seen example is a lack of focus on the new customers afterwards (Price, 2012). A deal exhibiting this error is the acquisition of Littlewoods by Marks & Spenser and its lack of focus on the customer base it had reached with the purchase (Rankine, 2001). This issue has been pointed to as the first signs of weakness in the Marks & Spenser organization (RetailWeek, 2009). Often a reflection of over-confidence by the acquiring company, ignoring the new customer base during the merger process results in a lower market share after the completion of the acquisition than the additive share the two companies had before the deal.
Although the failure rate of 90% may be an overestimation with the aim of catching the reader’s attention, it remains that mergers and acquisitions are risky. This discussion described problems that can occur at all stages of the deal process. Although focused on particular reasons for failure, in most cases it is actually a combination of factors that resulted in any deal not living up to the expectations of either party. Such failures do not benefit either party and can have an overall negative effect on the economy. Nevertheless, by recognizing the areas of concern, businesses involved in a merger or acquisition can increase their chances of being involved in one of the few deals that is trumpeted as being a success.
References
Miller, G., 2011. Ranbaxy’s manufacturing woes make Daiichi buy a ‘failure.’ FiercePharmaManufacturing.com. [online]. 16 March. Available at:
<http://www.fiercepharmamanufacturing.com/story/ranbaxys-manufacturing-woes-make-daiichi-buy-failure/2011-03-16> [Accessed on July 4, 2013].
Price, J. , 2012. Six reasons why so many acquisitions fail. Business Insider. [online] . 26 October. Available at:
< http://businessinsider.com/why-acquisitions-fail-2012-10> [Accessed on July 3, 2013].
Rankine, D., 2001. Why acquisitions fail. Upper Saddle River, NJ : FT Prentice Hall.
Rein, S., 2009. Why most M&A deals end up badly. Forbes. [online] 16 June. Available at:
<http://www.forbes.com/2009/06/16/mergers-acquisitions-advice-leadership-ceonetwork-recession.html> [Accessed on July 3, 2013].
RetailWeek. 2009. Twenty-one years of Marks & Spenser. 20 February. Available at:
<http://www.retail-week.com/21-years-of-marks-and-spencer/5003992.article>
[Accessed on July 4, 2013].
Siegenthaler, P. , 2010. Ten reasons mergers and acquisitions fail. The Telegraph. [online] 3 August. Available at:
< http://www.telegraph.co.uk/finance/businessclub/7924100/Ten-reasons-mergers-and-acquisitions-fail.html> [Accessed on July 3, 2013].
