If Most Mergers Fail Why Are

They so Popular?
Keith D. Brouthers, Paul van Hastenburg and Joran van den Ven

Why Managers Believe Their Referring to past studies of merger activity

Mergers Are Successful using share value as the m e ~ u r e of performance,
Michael Porter has stated that ', .. no self-
H o w often do we read in the business press about the respecting executive wouldjudge a
latest and greatest merger deal? Every few years the
leading business magazines run stories on 'merger
mania' suggesting that managers are seeking mergers firms do not benefit from mergers. Yet mergers
because it is the 'thing to do'. However, the over- are more popular today than ever before. This
whelming empirical evidence suggests, at least from
an acquiring firm's perspective, that mergers are, at
best, break-even situations and, at worst, failures. 2
Why then does the level and intensity of merger
activity continue to grow? Why do firms, both big and
small, use mergers as a major strategic option? recognizes the fact that managers have:multiple
A number of scholars 3 have suggested that this motives, use~k
difference between action--the continued pursuit of mergers using
mergers--and performance--the low rate of success- The results of applying this new m e t h ~ i o g y
ful mergers--may be caused by (1) managers pursuing to a small sam pie of DUtch mergers indicate that
goals other than shareholder wealth maximization
and, thus, empirical research is using an inaccurate
measure of performance; (2) managers being overly- this new approach to get a better idea of the
optimistic, thinking that they have learned from past
merger mistakes and that the next merger will be suc-
cessful, while in fact they continue to make the same
merger mistakes; (3) past empirical studies being
inaccurate because of data collection, time-periods
covered, or other statistical malfeasance.
Ingham, Kran and Lovestam 4 suggest that the con-
tinued interest in merger activity can be explained, motives can range from increasing profitability to
in part, by the sense among managers that mergers increasing managerial prestige. More recently, sch-
are truly successful, despite any studies that suggest olars have suggested that managers may have multiple
otherwise. In fact, in their study of U.K. merger activi- motives when undertaking a merger. 7 In this multiple
ties in the 1980s, '77% of managers stated that short- motive perspective, managers are attempting to ach-
run profitability did increase post-merger although, ieve several goals with the merger; such as increasing
in the long-run, this figure was 68%'. 5 sales, obtaining needed competencies, and improving
Merger and acquisition literature suggests that man- the image of the firm. If the existence of multiple
agers will have various motives for mergers. 6 These merger motives is correct, then past merger studies

Pergamon Long Range Planning, Vol. 31, No. 3, pp. 347 to 353, 1998
PII: 80024-6301(98)00029-6 © 1998 Elsevier Science Ltd. All rights reserved
Printed in Great Britain
0024-6301/98 $19.00+0.00
that attempt to measure merger success by examining
single financial indicators of performance (most com-
monly profitability or share value) tend to undervalue
the achievement of other goals and may fail to provide
an accurate picture of merger success.
One important issue when evaluating the per-
formance of mergers, or any strategic activity, is the
proper unit of measure. A number of researchers have
suggested that the proper way to measure strategic
performance is against a firm's set of key success
factors. These factors may include financial indi-
cators as well as qualitative objectives such as synergy
and image improvement. By using key success factors
as the measure of merger performance, managers can
get a better idea of the benefits attained from the
merger, not just a measure of whether shareholder
value has changed. Additionally, the use of key suc-
cess factors implies that managers have multiple
objectives in their strategic activities. Key success fac-
tors allow managers to measure performance on each
objective, not just a single objective as has been the
method in the past.
To help managers get a better idea of whether mer-
gers are successful or not, and to help managers evalu-
ate their own merger activities, we present a
methodology of evaluating merger performance
which is based on multiple motives, key success
factors, and multiple measures of performance. We
show that by comparing merger motives with out-
comes we can get a better idea of w h y managers 'feel'
mergers are successful, despite past evidence to the
contrary. In so doing, we hope to shed new light on
the performance of merger activities and to offer man-
agers a workable tool for evaluating past and future
merger activities.
The data utilized in this paper come from a recent
survey of the merger activities of large, publicly
traded Dutch firms for 1994. In 1994 there was a rec-
ord number of mergers in the U.S. with a total market
value exceeding $244 billion. 8 Europe too had an
active merger market in 1994 with mergers amounting
to $138 billion. 9 In that year 110 Dutch firms made
217 acquisitions.I° Of these, 47 publicly traded Dutch
companies were involved in 121 mergers, and we
surveyed each of these companies. Responses were
requested from the top financial manager of the
acquiring firm for each merger. We received a total of
17 responses from the 47 companies providing infor-
mation on 33 mergers. This response represents 27%
of the public mergers for 1994 in the Netherlands. The
year 1994 was selected to give the managers enough
time to evaluate the outcome of the merger, but is
recent enough for managers to recall their initial
merger aims. While our study is based on large pub-
licly traded Dutch firms, and may be biased towards
more successful mergers, we believe that the meth-
odology used will be of use to managers of smaller
firms and to managers of firms from other countries.
If Most Mergers Fail Why Are They so Popular?
Economic motives
Marketing economies of scale
Increase profitability
Risk-spreading
Cost reduction
Technical economies of scale
Differential valuation of target
Defence mechanism
Respond to market failures
Create shareholder value
Personal motives
Increase sales
Managerial challenge
Acquisition of inefficient management
Enhance managerial prestige
Strategic motives
Pursuit of market power
Acquisition of a competitor
Acquisition of raw materials
Creation of barriers to entry
Merger Motives
There appear to be three generally accepted categories
of merger motives (Table 1). First, mergers might be
undertaken to enhance the economic performance of
the firm. 11 Economic motives include increasing pro-
fits, achieving economies of scale, risk spreading, cost
reductions, obtaining a 'bargain' due to market valu-
ation differentials, taking a defensive stance, or
responding to market failures. Second, mergers may
occur because managers see a personal benefit. 12
These personal motives include increased prestige
through increased sales and firm growth, or increased
remuneration through increased sales or profitability.
Additionally, the managerial challenge presented by
integrating a new firm and overseeing the operations
of a larger firm may also contribute to the personal
motives of merger activities. Third, strategic motives
such as synergy, global expansion, pursuing market
power, acquisition of new resources (including mana-
gerial skills and raw materials), improving the com-
petitive environment by (1) acquiring a competitor or
(2) creating barriers to entry, or product line exten-
sions may motivate merger activities. 13
In our examination of Dutch merger activities we
asked the respondents to evaluate 17 merger motives
(Table 1). One or more of these 17 motives have been
previously included in other merger studies. 14 Par-
ticipating firm managers were requested to rate each
of the 17 motives on the importance of the motive in
a particular merger deal. Each motive could be given
a rating between (1) 'not important' to (7) 'extremely
important'.

Mean
Economic motives 2.889
Personal motives 2.154
Strategic motives 2.759
Rank Motive
1 Pursue market power
2 Increase profitability
3 Marketing economies of scale
4 Create shareholder value
5 Increase sales
6 Technical economies of scale
7 Cost reduction
8 Create entry barriers
9 Acquire competitors
10 Defence mechanism
11 Risk spreading
12 Managerial challenge
13 Acquire raw materials
Replace inefficient management
15 Enhance managerial prestige
Differential value of target
17 Market failure
Scale: (1) unimportant to (7) extremely important.
As indicated in Table 2A, the most important
merger category was 'economic motives' followed by
'strategic and personal motives'. This appears to sup-
port previous findings that indicated that economic
motives tend to be the driving force behind most mer-
gers. However, it does appear that both strategic and
personal motives are important. Thus, we may inter-
pret these findings as suggesting that multiple
motives exist, some of which are more important than
others.
Table 2B lists the mean importance of all 17
motives, in rank order. As this table shows, five
motives were rated above average: (1) pursuing mar-
ket power, (2) increasing profitability, (3) achieving
marketing economies of scale, (4) increasing share-
holder value, and (5) increasing sales. Interestingly,
these top five motives include one strategic motive,
one personal motive and three economic motives.
Again, this appears to support the concept of multiple
motives for mergers.
Finally, we counted the number of motives rated
above average in importance (above four, the middle
point) and noted, on average, firms indicated 4.7
motives had importance values between five and
seven. Finally, we found that on average each firm
had indicated 1.2 motives were extremely important,
giving them a rating of seven. Thus, this final analysis
also supports the concept of multiple motives for
most mergers.
Merger Performance
Measuring merger performance has been the most
onerous problem confronting researchers. Most stud-
ies of merger performance use one of two standard
financial measures: changes in profitability or chan-
ges in shareholder value, share price changes. 15 How-
Mean ever, the findings of these studies have been
disappointing or in many cases ambiguous. The rea-
5.242
5.065 son for these disappointing findings may be that the
4.394 measure of performance used in the studies do not
4.371 adequately measure the true performance achieved
4.303 by the firms involved in the mergers. 16 The measures
3.100 of performance used may be incorrect either because
2.933
2.207 (1) only one measure of merger performance was used
2.033 and management was attempting to achieve multiple
2.000 motives; (2) the measure used (an economic measure)
1.897 was not one of the merger motives of management
1.621
and therefore would not reflect merger performance;
1.552
1.552 (3) mergers of different sizes were aggregated, thus
1.138 mixing high-performing smaller mergers with low-
1.138 performing larger mergers (the effects of merger size
1.103 are discussed in the next section).
While a number of researchers have acknowledged
the shortcomings of using financial ratios or stock
value to measure merger performance, to date no
alternative measures have been suggested and tested.
In this study we suggest that a better performance
measure of an acquisition is not an arbitrary economic
measure of profitability or shareholder value, but is
the achievement or non-achievement of the original
objectives of the merger. Put another way, we believe
that the reason managers perceive mergers as being
successful, while economic measures continue to
show disappointing results, is that managers are mea-
suring success against a predetermined set of criteria
(key success factors) that they set at the outset of the
merger. Therefore, a better measure of merger success
or failure is the degree to which the merger achieves
these predetermined objectives.
The measure of key success factors used in this
study was the same listing of 17 potential objectives
that was used in the motivational section of the study.
We propose that once the objectives (motives) of the
merger have been determined, the success or failure
of that particular merger can be measured by exam-
ining the degree to which the motives (key success
factors) have been achieved. In our study, participants
were supplied with the list of 17 key success factors
and were asked to indicate how successful they were
at achieving each potential factor. Responses ranged
from (1) 'not realized' to (7) 'fully realized'.
As indicated in Table 3, five performance measures
had average values above the middle point. It there-
Long Range Planning Vol. 31 June 1998
 value because of differential valuations, did believe
they achieved a bargain because of market failure. In
Rank Motive Mean addition, mergers that aimed at achieving a mana-
gerial challenge did obtain increased managerial pres-
1 Pursue market power 5.433 tige. Finally, for firms pursuing two motives, no
2 Increase sales 5.385 performance gains were achieved. These two motives
3 Create shareholder value 5.320 were responding to market failure (ranked 17 in
4 Increase profitability 4.857
5 Marketing economies of scale 4.133 motive importance) and creating entry barriers
6 Technical economies of scale 3.609 (ranked 8 in motive importance). Thus for at least
7 Cost reduction 3.231 twelve of the motives in this study, we found stat-
8 Acquire competitors 2.957 istically significant support for the proposition that
9 Risk spreading 2.864 the merger was successful if measured against the key
10 Create entry barriers 2.591
11 Defence mechanism 2.435 success factor.
12 Managerial challenge 2.050 Second, Table 4 tends to indicate that the pursuit
13 Replace inefficient management 1.955 of one motive can help firms achieve superior per-
14 Acquire raw materials 1.750 formance in a number of areas. For example, the pur-
15 Enhance managerial prestige 1.350 suit of marketing economies of scale resulted not only
16 Differential value of target 1.095
17 Market failure 1.050 in achieving marketing economies, but also in achiev-
ing increased market power, increasing technical
Scale: (1) not realized to (7) fully realized. economies of scales, increased shareholder value and
increased profits. This provides statistically sig-
nificant support for the concept of using multiple
measures of performance.
fore appears that firms were able to achieve (1) an Third, if we had restricted our evaluation of per-
increase in market power, (2) an increase in sales, formance to one measure, as do most previous studies,
(3) the creation of additional shareholder wealth, (4) it is apparent that we may have mistakenly evaluated
increased profitability, and (5) marketing economics many mergers included in this study as failures, even
of scale in most of the mergers. Since these five per- though they were actually successful. For example,
formance measures are identical to the top five if our single measure of performance was increased
motives, it appears that firms are successful in achiev- profits (or a financial ratio that included profits, such
ing their merger objectives. as ROI) we w o u l d have found only four types of mer-
Looking more closely at the issue of merger success, gers to have been successful: those mergers that were
we performed a correlation analysis on the merger intended to achieve (1) marketing economies of scale,
motives and performance measures to try to deter- (2) technical economies of scale, (3) the creation of
mine, statistically, if there is a relationship between increased shareholder wealth, and (4) increased pro-
motives and performance. Table 4 reveals a number fitability. Mergers that were formed for any of the
of interesting findings in this area. First, for 12 of other 17 reasons (motives) w o u l d have been con-
the 17 motives, managers indicated a high degree of sidered as failures, despite achieving the objectives
achievement. These 12 motive/performance com- set by management. These correlation analyses pro-
binations were: vide strong support for the concept of using multiple
performance measures and using non-economic (key
• pursuing market power success factor) performance measures.
• acquiring a competitor
• achieving both marketing and technical economies
of scale
• acquiring a source of raw materials Small versus Large Mergers
• spreading risk A final area that needs to be examined is performance
• reducing costs differences between large and small mergers. Some
• merging to achieve a defence mechanism against
researchers have suggested that small mergers (mer-
potential competitors
gers where the two firms are very different in size)
• increasing overall sales tend to produce higher performance than larger mer-
• creating increased shareholder value gers (mergers where the two firms are similar in
• increasing overall profitability size). 17 They attribute these performance differences
• enhancing managerial prestige. to the ease of combining operations. With smaller
Further, for three of the motives some significant mergers the integration of the n e w entity is more eas-
performance was achieved, but not in the area of the ily controlled and the disruption to the organization
objective. For example, firms pursuing the replace- as a whole is minimized. With a large merger, the
ment of inefficient management and obtaining a good integration problems are multiplied and disruption

If Most Mergers Fail Why Are They so Popular?

Motive Performance •

Pursue market power Pursue market power 0.8068**

Increase sales 0.5987*
Acquire competitor Acquire competitor 0.8758**
Acquire raw materials 0.6212"
Marketing economies of scale Marketing economies 0.9471"*
Pursue market power 0.7744**
Technical economies 0.7941"*
Shareholder value 0.7626**
Increase profits 0.8330**
Technical economies of scale Technical economies 0.8667**
Pursue market power 0.5745*
Marketing economies 0.5768*
Increase profits 0.6099*
Acquire raw materials Acquire raw materials 0.9404**
Acquire competitor 0.6040*
Spread risk Spread risk 0.6612"
Market failure 0.5923*
Cost reduction Cost reduction 0.5945*
Defence mechanism Defence mechanism 0.6759*
Increase sales Increase sales 0.5989*
Technical economies 0.6176"
Create shareholder value Shareholder value 0.7939**
Marketing economies 0.6690*
Technical economies 0.6779*
Increase profits 0.7493**
Increase profitability Increase profits 0.7227**
Market power 0.8122"*
Marketing economies 0.6968**
Technical economies 0.7195"*
Spread risk 0.6466*
Increase sales 0.5970*
Shareholder value 0.6108"
Enhance managerial prestige Managerial prestige 0.6448*
Replace inefficient management Market failure 0.5725*
Differential value Market failure 1.0000"*
Managerial challenge Managerial prestige 0.9105**

*P= 0.01, **P= 0.001.

can occur throughout the whole organization.
However, as Lubatkin 18 and Seth 19 point out, the few
studies that have examined this size issue have found
that larger mergers tend to be more successful than
smaller ones (at least for companies in related indus-
tries). Thus, there appears to be some suggestion that
the size of the merger may account for different fin-
dings in previous studies, masking true performance
pictures.
In the present study, we separated the 33 mergers
into two groups. In the first group were 14 large merg-
ers, in the second group 19 small mergers. First, we
looked for differences in merger motives between the
two groups. We found that firms involved in large
mergers tended to rate the following five motives sig-
nificantly (P< 0.05) higher (more important) than did
firms involved in small mergers: (1) achieve market
power, (2) acquire a competitor, (3) provide tech-
nological economies of scale, (4) increase firms sales,
and (5) increase firm profitability. However, these dif-
ferences in motives did not translate themselves into
differences in performance. When we examined per-
formance differences, we found only one significant
(P<0.05) different between firms involved in large
and small mergers. In running t-test analyses we
found that firms involved in large mergers tended
to perform significantly (t=2.27, P=0.034) better in
increasing sales than did firms involved with small
mergers, an obvious outcome. Supporting the findings
of Lubatkin, 2° we can conclude that there are no
performance differences between large and small
mergers.
Conclusions and Recommendations
Do mergers result in success for the acquiring firm or
are managers deluded into a 'pack' mentality which

Long Range Planning Vol. 31 June 1998

causes them to rush headlong into irrational invest-
ments? If we examined most of the past academic
literature in the area of mergers and acquisitions, we
would be left with the impression that mergers are
not effective and that managers are simply deluding
themselves into thinking that their merger will be one
of the successful few.
This study presents a new methodology for eva-
luating the success or failure of merger activities. The
new methodology is based on three key concepts.
First, we recognize the fact that managers have mul-
tiple motives for participating in a merger. Therefore,
the new model contains 17 of the most widely cited
motives for merger activity. Second, we believe that
performance should be measured against the goals
and objectives set by management, not necessarily
against financial results. This leads us to recommend
the use of key success factors as the measures of per-
formance. Third, we support the fact that mergers can
create performance improvement in a number of areas
of the firm. Therefore it is prudent to utilize multiple
measures of performance.
Using a sample of Dutch mergers, we tested our
new model and showed its applicability. The results
strongly support the use of the model. In our exam-
ination of managerial motivation, we discovered that
managers have multiple purposes for pursuing merg-
ers. Additionally, we discovered that in many cases
these merger motives did not include improved econ-
omic performance. This accounts for some of the
negative findings of previous studies which assumed
that all mergers were motivated by the single pursuit
of economic gains.
In the area of performance measures, our meth-
odology again helped clarify several issues. First, the
use of key success factors, as the measure of per-
formance helps in explaining w h y managers feel mer-
gers are successful while analysts insist this is
incorrect. By matching the performance of the merger
with the key success factors, we found that in most
cases management was right, mergers are successful.
Second, the new methodology shows that multiple
measures of merger will enhance our understanding
of the benefits of mergers. In most cases mergers
resulted in performance improvement in multiple
areas of the firm. The use of multiple measures will
help managers determine where benefits are being
achieved and where improvement still needs to be
made. The new methodology again helps resolve
some of the mystery of w h y mergers are successful in
some eyes and not in others. Using this new meth-
odology will help managers and researchers come to
similar judgements about merger activity.
Finally, with the aid of the new methodology we
looked for differences between large and small merg-
ers. The findings of previous studies are unclear on
the benefits of one size of merger over another. Our
study has shown that although there may be dif-
ferences in the motives based on size, performance
does not appear to be affected.
According to this new methodology managers are
right, mergers are successful. The problem seems to
be that in the past researchers were looking at one
measure of success while managers were pursuing
and achieving a different measure. In fact our study
shows, and the methodology supports, the concept
that mergers are triggered by multiple motivations
and that one or more of the objectives set by man-
agement are being achieved. We believe that the meth-
odology provided in this paper can help both
managers and academics get a better understanding
of the actual impact of mergers on the performance of
the acquiring firm.

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If Most Mergers Fail Why Are They so Popular?

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Long Range Planning Vol. 31 June 1998