Why Some Mergers and Acquisitions Fail?
Things to be really careful about in doing mergers and acquisitions.
Statistics show that there is an estimated 2/3rds of big mergers that eventually lose value on the stock market. There are also numerous studies that reveal that the management executives in companies that merge tend to transfer to other companies. Why does this happen? Here are some important things to consider.
Decision based on subjectivity and not on the objective study of the market
Mergers and acquisitions are moves that give power and prestige to top executives. When a merger and an acquisition happens, the fame and the credit all goes to top executives. Thus it is widely assumed that all mergers and acquisitions are positive steps in all occasions. Statistics belie this claim. Sometimes it just becomes a matter of corporate pride or envy that prompts top executives to push through mergers and acquisitions. It becomes a fad that is not based on a scientific and objective assessment of the dynamics of the market. In the end, one only seeks for the glory but will neither find the glory nor the gold. Aside from the practice as being a big boost to corporate ego, bankers, middlemen, top executives who will get a cut, advisers, and lawyers who stand to profit from the act will provide unstoppable arguments to push through. This is because they would stand to personally gain from the deal without really thinking if it would really be for the benefit of the whole company.
Remember, the first consideration in doing mergers is the share price and the profitability of the corporation in general, not the glory nor the personal gains that the dealers would get.
Flawed Speculations
The temptation for mergers and acquisitions is usually strongest when there is a booming stock market. The promise of profit in these times compels many corporations to continually invest. Mergers and acquisitions are the best and easiest ways of expanding a business. There is a promise of more savings due to economies of scale, while there would be higher profits due to higher production. However, this tends to overshoot expectations and to produce more than the market can accommodate. Thus the market contracts eliciting a falling rate of profit. Companies would lose value in the stock market, and production and profitability eventually decrease.
Mergers driven by fear and anxiety
The basic assumption in the market is that only the big players make it. Thus there is a mounting pressure for all corporations to become big in a short period of time. Thus the motivation is based on fears and uncertainties. With technological advances and a volatile economy, some are just compelled to jump head on into a merger without really studying meticulously all the intricacies and implications.
Wrong Processes
Mergers and acquisitions are important business moves that must be taken into careful consideration. Sometimes, core businesses are neglected because of the problems and tasks associated with the deal. The thrill of the big deal sacrifices the most important work of all-the daily productive grind. Sometimes top managers focus too much on cost cutting to the point that they neglect the more important job of creating more revenues. It also happens that the management of the companies being merged do not follow a smooth transition process. Employees become uncertain. Conflicts are not resolved as fast creating a domino effect. The merging of two corporate cultures undergo difficulties. Resentment and frustration sets in. Productivity suffers. In the end, the basic operations suffer which is actually the backbone of the business.
To conclude, the decision to doing mergers and acquisitions should be carefully studied and the processes to execute them should be meticulously planned.