Nine reasons why mergers fail

Though many companies eagerly tie up with each other in order to reap some benefits, they end up failing for simple reasons

Nine reasons why mergers fail

Though many companies eagerly tie up with each other in order to reap some benefits, they end up failing for simple reasons

The news that eBay is selling 65 per cent of Skype for $1.9 billion to a group of VCs should come as no surprise to most of us. John Donahoe, eBay's CEO, put it bluntly when he said, "Skype is a strong standalone business, but it does not have synergies with our e-commerce and online payments business."

In fact, a lack of synergy is one of the reasons why a merger fails. There are many more, including:

>> Culture shock: Can you imagine IBM buying Google? The 'suit' culture of IBM will not at all jell with the casual approach that Google has, and a merger of this sort would fail miserably.

>> 2+2>4 attitude: This is a merger between #2 and #3 trying to take over #1 by merging. Typically, the customers of both #2 and #3 get confused and move to #1, leaving the merged entity in the lurch.

>> No plan: Two companies try to sometimes merge and see if they can work out something in the long run. But if both of them didn't have a plan to begin with, then they may end up not having a plan even when they join.

>> Poor integration: In IT, integration between products matters a lot, and a company that tries to grow by acquiring many companies tends to fail simply because it looks like a jigsaw puzzle that has not been put together properly.

>> People trouble: Many companies tend to tell employees about mergers way too late in the day, and so confused people tend to leave and the ones who leave first are the smartest ones.

>> Lack of enthusiasm: Usually you hear of a brilliant start-up that was acquired by a respected brand and one year later, the founder of the start-up decides to 'pursue other interests' and from then on, the project runs out of steam. This is partially related to culture shock listed above, but there is one difference the failure here happens more due to lack of enthusiasm because the bright idea has become staid as time passes.

>> Who needs you? Sometimes, two companies decide to merge a little too late, when both their technologies have been outdated and surpassed by a superior force. A merger at such a time is not bound to produce the best of results. In fact, the top gun company may actually benefit while the two merged companies struggle to find their collective feet.

>> Poor decisions: Who will do what at the top management level once the merger happens? Will the CFO of the bigger entity become the CFO of the combined entity even if the CFO of the smaller company is more capable? Put the wrong CFO on top and he will botch up, while the better CFO resigns in disgust and moves on to a competitor.

>> Ego clashes: This is ultimately one of the reasons why a merger fails. People who have been given short shrift, or who perceive it as such (let's face it, most of us are legends in our own minds) are bound to try to cause friction, leading to a failed merger.

QUICK TAKE
>>There are many reasons why M&As fail
>>Most of them are related to people
>>Culture shock also figures prominently

What the experts say
Albert Banal-Estau00f1ol of the University of Western Ontario and Jo Seldeslachts of Wissenschaftszentrum Berlin in their paper Merger Failures published in April 2005 say that, from 1990 to 2005, 43 per cent of all merged firms worldwide reported lower profits than comparable non-merged firms. Their theory of failures is based on three ingredients:

1. Firms posses some private information about the potential synergy gains when making merger decisions
2. Synergy realisation, and therefore merger performance, hinges upon the exertion of costly integration efforts
3. Post-merger efforts show strategic uncertainty
Source: https://skylla.wz-berlin.de/pdf/2005/ii05-09.pdf