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Why Do Mergers Fail

Why Do Mergers Fail

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Published by: saldanha889 on Nov 12, 2009
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Assignment II
Mergers Acquisitions & CorporateRestructuring‘Why do Mergers fail?’
Submitted to:
Dr. Beena DiasProfessor AIMIT
Submitted by:
Mr. Nithin Pradeep SaldanhaReg. No. 0816093IInd MBA ‘B’ BatchAIMIT
Date of Submission:
November, 2009.
Why do mergers fail?
Globalisation is the challenge, and for big business mergers are the solution. However, alltoo often the multi-billion dollar deals turn sour. The battle of three French banks over whoshould merge with whom is the latest example, and the managers making the deals might pause toask if the end result will be worth it. The six-month battle involving BNP, Paribas and SocieteGenerale has been fought via advertising and in courtrooms, two costly arenas. Investorsscrutinising the minutiae of the legal battles should worry if such a merger will create shareholder value. Chances are it won't. Whatever the logic or likely success of the French bank merger,analysts agree that many mergers are hit or miss. Commerzbank research -some of it anecdotal -says that more than half of mergers ultimately fail to create value.Merger gains may have a short shelf life, Commerzbank said, with the merger onlytemporarily offsetting an inevitable decline. "Some research does show that companies don'tdeliver on all the promises they make," Stephen Barrett, head of mergers & acquisitions atKPMG, said, but he added that "many do create shareholder value". The problem, he said, wasthat little empirical evidence existed as to the success of merger and acquisition activity.With the recently announced mergers involving Procter & Gamble and Gillette, and SBCand AT&T, it's time to ask one of the most common questions about mergers: What does it takefor a company to be successful, post merger? After all, many mergers ultimately don't add valueto companies, and even end up causing serious damage. "Studies indicate that several companiesfail to show positive results when it comes to mergers," says Wharton accounting professor Robert Holthausen, who teaches courses on M&A strategy. Noting that there have been"hundreds of studies" conducted on the long-term results of mergers, Holthausen says thatresearchers estimate the range for failure is between 50% and 80%.Management professor Martin Sikora, editor of Mergers & Acquisitions: The Dealmaker'sJournal, agrees. "Companies merge and end up doing business on a larger scale, with increasedeconomic power," Sikora says. "But the important questions are whether or not they gainedcompetitive advantage or increased market power. And that will be reflected in the stock price."The truth is," he adds, "mistakes happen. The accepted data say that most mergers andacquisitions don't work out."
Merger Failure Rates:
The burning question remains-why do so many mergers fail to live up to stockholder expectations? In the short term, many seemingly successful acquisitions look good, butdisappointing productivity levels are often masked by one-time cost savings, asset disposals, or astute tax maneuvers that inflate balance-sheet figures during the first few years. Merger gains arenotoriously difficult to assess. There are problems in selecting appropriate indices to make anyassessment, as well as difficulties in deciding on a suitable measurement period. Typically, thecriteria selected by analysts are:
 profit-to-earning ratios;
stock-price fluctuations;
managerial assessments.Irrespective of the evaluation method selected, the evidence on M&A performance isconsistent in suggesting that a high proportion of M&As are financially unsuccessful. US sources place merger failure rates as high as 80%, with evidence indicating that around half of mergersfail to meet financial expectations. A much-cited McKinsey study presents evidence that mostorganizations would have received a better return on their investment if they had merely bankedtheir money instead of buying another company. Consequently, many commentators haveconcluded that the true beneficiaries from M&A activity are those who sell their shares whendeals are announced, and the marriage brokers—the bankers, lawyers, and accountants—whoarrange, advise, and execute the deals.
"What Went Wrong?"
According to Steve Tobak is managing partner of Invisor Consulting LLC, the kinds of  problems companies face with mergers range from poor strategic moves, such as overpayment, tounanticipated events, such as a particular technology becoming obsolete. "You would hope thesecompanies have done their due diligence, although that isn't always the case," he says. Aside fromthose extremes, however, many analysts view clashing corporate cultures as one of the mostsignificant obstacles to post-merger integration. In fact, a cottage industry of sorts has emerged to

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