Why Mergers Fail

Why 70% of Mergers and Acquisitions Fail,
and Why This Doesn't Have to Happen to You

by Brien Palmer

It's a fact: most business acquisitions and mergers fail. Management desires the gains that consolidation and economies of scale should bring, but in fact the great majority of M&As-across all industries-do not live up to their promises. On paper, two plus two should equal five. In fact, two plus two usually equals three. This has been conclusively shown by dozens of studies covering hundreds of companies across all industries. Some excerpts:

"70 percent of mergers fail to achieve their anticipated value…" — WEEKLY CORPORATE GROWTH REPORT

"Most [mergers] fail to add shareholder value-indeed, post-merger, two-thirds of the newly formed companies perform well below the industry average." —HARVARD MANAGEMENT UPDATE

"A Towers Perrin study of 150 mergers of financial-services firms found that 30% of deals substantially eroded shareholder value, and another 20% eroded shareholder value somewhat…" — BEST'S REVIEW/PROPERTY-CASUALTY INSURANCE EDITION

"And despite the well-publicized, much-analyzed fact that many of these mergers -- up to 70%, according to some estimates -- failed to create value, it seems clear that the end is not yet in sight." —FINANCIAL EXECUTIVE

"One-third of the transactions provided marginal returns, while only 17% provided substantial returns to shareholders." About these figures, one expert said: "That's a staggering number. That means those organizations were better off before they merged than after they merged." —BEST'S REVIEW/PROPERTY-CASUALTY INSURANCE EDITION

Why?
The simple answer is that most executives manage the business integration but do not manage the human integration. Eager for the gains anticipated, they treat the acquisition like a series of financial reports, instead of proud and vibrant organizations comprised of human beings.

"Cultural integration is ignored in the majority of business combinations. This is a major reason why 60 percent to 80 percent of all business combinations undergo a slow, painful demise." — JOURNAL OF PROPERTY MANAGEMENT

"By some estimates, 85 percent of failed acquisitions are attributable to mismanagement of cultural issues." —INDUSTRIAL MANAGEMENT

So, while the acquisition or merger looks good on paper, companies often fail to recognize the human actions necessary to make two separate organizations behave like one. And the reasons for this are simple.

First, the people who focus on the acquisition are skilled in strategy, the industry and in finance. They have a very clear picture of the desired objectives of the acquisition, and understand how the new organization should return business efficiencies. But given the time demands of the pre-purchase activities, and their tendencies to focus on financial and business issues, the "people" issues often receive short shrift.

Second, the people most affected by the action-the employees of the purchased organization-do not know the business objectives, see change as a threat, have no real influence over the events, and wonder immediately how they will be affected personally.

Not surprisingly, the focus and priorities of the two groups are likely to diverge starkly. This is the main reason why more than 70 percent of business combinations fail: they do not pay sufficient attention to the messy, detailed, nuts-and-bolts human issues.

"While two-thirds of those surveyed had a systematic approach to sniffing out potential M&A targets, three-quarters of the respondents had no clear process for the integration phase once the merger was consummated." —TELEPHONY

How to Do It Right
In the minority of cases when mergers and acquisitions do work, it was because companies spent significant time and effort addressing the "people" issues, including:

culture
communications
teamwork
shared vision
joint work on integration projects
goal-setting
recognition
trust-building, and many other similar details.

Successful combinations are like successful marriages: they take a lot of work on many fronts, especially the people issues.

"In acquisitions that do fulfill their promise -- that really make two and two equal five -- leaders paid a great deal of attention to the integration process and, not surprisingly, involved people at all levels of the process." —ACADEMY OF MANAGEMENT EXECUTIVES

To do it right, you must compare the cultures of the organizations, carefully plan their integration, communicate relentlessly, build trust, and be open to change yourself.

Get Insurance
The odds are against you. Most mergers and acquisitions fail, at a high cost to the businesses and the people involved. The historical evidence is clear and convincing.

If you are embarking on a merger or acquisition (or if you have completed one), you owe it to the organization to put the odds in your favor. You should plan to spend at least as much time on the social and HR issues as on the financial, legal and business-systems issues.

If you are confident in your internal abilities to manage the merging of two cultures, with the same level of expertise that you are applying to the legal and financial issues, you could do this in-house. Some excellent companies that have active growth-by-acquisition strategies maintain an internal staff dedicated to integration services. For example, Cisco Systems has an experienced staff, as does Kennametal Inc.

On the other hand, if you would like to use experienced outside professionals, with no internal stake in the outcome, call us. We will be glad to give you free professional advice, and some honest feedback on your current situation.

For more information on InterLINK's Merger Integration services, click here, or call 724-733-5007.

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