Fullure mergers

by NIYATI OJHA on NOVEMBEP 2, 2008

Its no secret thut plenty of mergers dont work. Those who udvocute mergers wlll urgue thut the merger wlll cut costs or
boost revenues by more thun enough to |ustlfy the prlce premlum. It cun sound so slmple: |ust comblne computer systems,
merge u few depurtments, use sheer slze to force down the prlce of supplles und the merged glunt should be more
profltuble thun lts purts. In theory, 1+1 = 3 sounds greut, but ln pructlce, thlngs cun go uwry.
Hlstorlcul trends show thut roughly two thlrds of blg mergers wlll dlsuppolnt on thelr own terms, whlch meuns they wlll lose
vulue on the stock murket. The motlvutlons thut drlve mergers cun be fluwed und efflclencles from economles of scule muy
prove eluslve. In muny cuses, the problems ussocluted wlth trylng to muke merged compunles work ure ull too concrete.
Coplng wlth u merger cun muke top munugers spreud thelr tlme too thlnly und neglect thelr core buslness, spelllng doom.
Too often, potentlul dlfflcultles seem trlvlul to munugers cuught up ln the thrlll of the blg deul.
The chunces for success ure further humpered lf the corporute cultures of the compunles ure very dlfferent. When u
compuny ls ucqulred, the declslon ls typlcully bused on product or murket synergles, but culturul dlfferences ure often
lgnored. Its u mlstuke to ussume thut personnel lssues ure euslly overcome. For exumple, employees ut u turget compuny
mlght be uccustomed to eusy uccess to top munugement, flexlble work schedules or even u reluxed dress code. These
uspects of u worklng envlronment muy not seem slgnlflcunt, but lf new munugement removes them, the result cun be
resentment und shrlnklng productlvlty.
WHAT IS A FAILED MEPGEP?
A fulled merger cun be understood ln two wuys: Ouulltutlvely, whutever the compunles hud ln mlnd thut cuused them to
merge ln the flrst pluce doesnt work out thut wuy ln the end. Ouuntltutlvely, shureholders suffer becuuse operutlng results
deterlorute lnsteud of lmprove.
Studies reveal that approximately 40% to 80% of mergers and acquisitions prove to be
disappointing. The reason is that their value on the stock market deteriorates. The intentions and
motivations for effecting mergers and acquisitions must be evaluated for the process to be a
success. It is believed that when two companies merge the combined output will increase the
productivity of the merged companies. This is referred to as economies of scale. However, this
increase in productivity does not always materialize.

Heres u llst of notorlous fulled mergers thut evuluuted ln one wuy or unother: AOL/Tlme Wurner, HP/Compuq,
Alcutel/Lucent, Dulmler Benz/Chrysler, Exclte/@Home, JDS Unlphuse/SDL, Muttel/The Leurnlng Compuny,
Borlund/Ashton Tute, Novell/WordPerfect, und Nutlonul Semlconductor/Fulrchlld Semlconductor.
Some fulled so spectuculurly thut the comblned compuny went down the tubes, others resulted ln the demlse of the
executlve(s) thut mustermlnded them, some luter reversed themselves, und others were |ust pluln dumb ldeus thut were
doomed from the sturt.
There are several reasons merger or an acquisition failure. Some of the prominent causes are
summarized below:
If u merger or ucqulsltlon ls plunned dependlng on the (bulllsh) condltlons prevulllng ln the stock murket, lt muy be
rlsky.
There ure tlmes when u merger or un ucqulsltlon muy be effected for the purpose of seeklng glory, ruther thun
vlewlng lt us u corporute strutegy to fulflll the needs of the compuny. Pegurdless of the orgunlzutlonul goul, these top
level executlves ure more lnterested ln sutlsfylng thelr executlve ego.
In uddltlon to the ubove, fullure muy ulso occur lf u merger tukes pluce us u defenslve meusure to neutrullze the
udverse effects of globullzutlon und u dynumlc corporute envlronment.
Fullures muy result lf the two unlfylng compunles embruce dlfferent corporute cultures.
It ls trudltlonul to ussume thut ucqulsltlons full. In 1987, Hurvurd professor Mlchuel Porter observed thut between 50 und
60% of ucqulsltlons were fullures. There huve been severul other studles slnce then, und the results huve contlnued to
support hls concluslons. In 1995, for exumple, Mercer Munugement Consultlng noted thut between 1984 und 1994, 60% of
the flrms ln the Buslness Week 500 thut hud mude u mu|or ucqulsltlon were less profltuble thun thelr lndustry. In 2004,
McKlnsey culculuted thut only 23% of ucqulsltlons huve u posltlve return on lnvestment. Acudemlc reseurch ln strutegy und
buslness economlcs huve tuken these concluslons further, suggestlng thut ucqulsltlons destroy vulue for the ucqulrlng
flrms shureholders, ulthough they creute vulue for the shureholders of the turget flrm, somethlng thut wus conflrmed by u
recent study currled out by the Boston Consultlng Group (2007). Of course results vury dependlng on the type of
ucqulsltlon, the slmllurlty of the two protugonlsts lndustry, the lnternutlonul or domestlc nuture of the operutlon, etc., but
the overull trend remulns the sume.
It would not be correct to say that all mergers and acquisitions fail. There are many examples of
mergers that have boosted the performance of a company and addressed the well-being of its
shareholders. The primary issue to focus on is how realistic the goals of the prospective merger
are.

Compunles merge when, for one reuson or unother, thelr struteglc pluns lndlcute they should.
Thut belng the cuse, there must ulso be operutlng synergles between the two compunles. In u nutshell, thut meuns the
whole wlll be flnunclully heulthler thun the sum of the purts. Suld dlfferently, ut some polnt ufter the merger ls complete und
the compunles ure lntegruted wlth redundunt functlons ellmlnuted, shureholder vulue lncreused. Its thut slmple
theoretlcully.
Apart from the above mentioned reasons, given below are some more reasons which result in
failed mergers:
1. /uck of Communlcutlon
2. /uck of Dlrect Involvement by Humun Pesources
3. /uck of Trulnlng
4. /Rss Rf Key PeRple und Tulented EmplR\ees
5. /Rss Rf CustRmers
6. CRrpRrute Culturul Clush
7. PRwer PRlltlcs
8. Inudequute Plunnlng

While it is true that some of these failures can be largely attributed to financial and
market factors, many studies are pointing to the neglect of human resources issues as the
main reason for M&A failures. A 1997 PricewaterhouseCoopers global study concluded
that lack of management and related organizational aspects contribute significantly to
disappointing post-merger results.
Provided that they have equal or less information than their management, shareholders of each
firm accept the merger agreement. The merger goes then ahead and fails. This happens because
the obtained synergy gains do not compensate the costs of merging.
Accordingly, these mergers are unprofitable. Share prices, on the other hand, can
rise at the moment of the merger announcement if markets do not have merging firms
private information about the synergy gains.

A majority of corporate mergers fail. Failure occurs, on average, in every sense:
acquiring firm stock prices tend to slightly fall when mergers are announced; many acquired
companies are later sold off; and profitability of the acquired firm is lower after the merger
(relative to comparable non merged firms).
One Rf the muln dlfflcultles ln meusurlng ucqulsltlRQ perfRrmuQce lles lQ the ussessmeQt methRds used. These methRds
lQclude meusurlQg the stRck murket reuctlRQ vululQg the whRle eQtlt\ ufter ucqulsltlRQ ubQRrmul returQs s\Qergles uQd
ecRQRmles Rf scule tR Qume |ust the mRst cRmmRQ. HRwever the\ ull luck the cupuclt\ tR lsRlute the sRle lmpuct Rf the
ucqulsltlRQ RQ the flrms vulue frRm the plethRru Rf eveQts thut Rccur lQ these clrcumstuQces. WheQ RQe ussess the stRck
murket reuctlRQs tR uQ ucqulsltlRQ Rver u 180-du\ wlQdRw u Qumber Rf Rther eveQts huve lmpucted RQ the shure vulue
durlQg thls perlRd. At best these methRds ullRw us tR meusure the flQuQclul murkets shRrt-term reuctlRQ.
MuQ\ buslQess cRmmeQtutRrs ure QRw uckQRwledglQg thut fullure dRes QRt huve lts rRRts slmpl\ lQ flQuQclul mRQetur\ uQd
legul lssues but lQ luck Rf lQterculturul s\Qerg\. Peseurch suggests thut up tR 65% Rf fulled mergers uQd ucqulsltlRQs ure
due tR peRple lssues l.e. lQterculturul dlffereQces cuuslQg cRmmuQlcutlRQ breukdRwQs thut result lQ pRRr prRductlvlt\.
DAIMLEPCHPYSLEP MEPGEP A CULTUPAL MISMATCH?
A receQt exumple Rf such lQterculturul fullure hus beeQ thut Rf DulmlerChr\sler. BRth sldes lQ the purtQershlp set Rut tR
shRw thut lQterculturul hurdles wRuld uQd cRuld be RvercRme lQ thelr glREul merger. PeceQt urtlcles lQ the Wull Street
JRurQul uQd BuslQess Week suggest hRwever thut DulmlerChr\sler uQderestlmuted the lQflueQce Rf culture uQd due tR
culture clush ulmRst twR \eurs luter ls stlll struggllQg tR EecRme u uQlfled glREul RrguQlzutlRQ.
IQ the perlRd leudlQg up tR the Dulmler-Chr\sler merger ERth flrms were perfRrmlQg qulte well (Chr\sler wus the mRst
prRfltuEle AmerlcuQ uutRmuker) uQd there wus wldespreud expectutlRQ thut the merger wRuld Ee successful (CRRk 1998).
PeRple lQ ERth RrguQlzutlRQs expected thut thelr merger Rf equuls wRuld ullRw euch uQlt tR EeQeflt frRm the Rthers
streQgths uQd cupuEllltles. StRckhRlders lQ ERth cRmpuQles RverwhelmlQgl\ upprRved the merger uQd the stRck prlces uQd
uQul\st predlctlRQs reflected thls Rptlmlsm.
Performance after the merger, however, was entirely different, particularly at the Chrysler
division. In the months it was found that the high rate of turnover among management at
acquired firms was not related to poor prior performance, indicating that the turnover was not
due to the pruning of underperforming management at the acquired firm.
Following the merger, the stock price fell by roughly one half since the immediate post merger
high. The Chrysler division, which had been profitable prior to the merger, began losing money
shortly afterwards and was expected to continue to do so for several years. In addition, there
were significant layoffs at Chrysler following the merger (that had not been anticipated prior to
the merger. Differences in culture between the two organizations were largely responsible for
this failure.

Operations and management were not successfully integrated as equals because of the entirely
different ways in which the Germans and Americans operated: while Daimler-Benzs culture
stressed a more formal and structured management style, Chrysler favored a more relaxed,
freewheeling style (to which it owed a large part of its pre merger financial success). In addition,
the two units traditionally held entirely different views on important things like pay scales and
travel expenses. As a result of these differences and the German units increasing dominance,
performance and employee satisfaction at Chrysler took a steep downturn. There were large
numbers of departures among key Chrysler executives and engineers, while the German unit
became
increasingly dissatisfied with the performance of the Chrysler division. Chrysler employees,
meanwhile, became extremely dissatisfied with what they perceived
as the source of their divisions problems: Daimlers attempts to take over the entire organization
and impose their culture on the whole firm failed.

While cultural conflict often plays a large role in producing merger failure, it is often
neglected when the benefits of a potential merger are examined. For instance, following the
announcement of the AOL Time Warner deal, a front-page Wall Street Journal article (Murray et
al. 2000) discussed possible determinants of success or failure for the merger (such as synergies,
costs, competitor reaction, and so forth). The only clear discussion of possible cultural conflict is
a single paragraph (out of a 60-column-inch article) revealing how the different personalities
of AOLs Steve Case and Time Warners Gerald Levin reflect cultural differences between the
two firms. A similar article included a single paragraph entitled What could go wrong with the
synergy strategy. Moreover, in these sorts of short, cursory, obligatory discussions of possible
cultural conflict, there is rarely discussion of what steps might be taken if there is dramatic
conflict. While culture may seem like a small thing when evaluating mergers, compared to
product-market and resource synergies, we think the opposite is true because culture is
pervasive. It affects how the everyday business of the firm gets donewhether there is shared
understanding during meetings and in promotion policy, how priorities are set and whether they
are uniformly recognized, whether promises that get made are carried out, whether the merger
partners agree on how time should be spent, and so forth.

The guiding hypothesis is that an important component of failure is conflict between the merging
firms cultural conventions for taking action, and an underestimation by merger partners of how
severe, important, and persistent conflicts are. Cultural conventions emerge to make individual
firms more efficient by creating a shared understanding that aids communication and action.
However, when two joined firms differ in their conventions, this can create a source of conflict
and misunderstanding that prevents the merged firm from realizing economic efficiency
6uch dlscRurse ls hlghllghtlQg the Qeed fRr mRre lQterculturul trulQlQg ERth wlthlQ the frumewRrk Rf mergers uQd
ucqulsltlRQs uQd fRr ke\ persRQQel such us muQugers uQd HP depurtmeQts. IQ ERth lQstuQces culture ls EelQg lgQRred ruther
thuQ EelQg emEruced uQd used pRsltlvel\.
PlerR MRrRslQl emphuslzes thut mlsuQderstRRd QutlRQul culturul dlffereQces huve EeeQ clted us the mRst lmpRrtuQt fuctRrs
EehlQd the hlgh fullure rute Rf glREul JVs [|RlQt veQtures] uQd ullluQces.
0RrRslQl urgues thut wheQ lQterculturul dlffereQces ure lgQRred durlQg the evuluutlRQ uQd QegRtlutlRQ stuges Rf u merger
lQtegrutlRQ lQevltuEl\ fulls. He udds thut the muQQer lQ whlch uQ RrguQlzutlRQ huQdles lQterculturul chulleQges ls dlrectl\
cRrreluted wlth the perfRrmuQce Rf the merger lQ the pRst-lQtegrutlRQ stuge uQd cuQ meuQ the dlffereQce EetweeQ lRQg-term
success Rr fullure.
If lQterculturul uQderstuQdlQg ls tR Ee recRgQlzed wlthlQ the s\stems Rf prRcesses Rf mergers uQd ucqulsltlRQs stuff trulQlQg
ls crltlcul. It ls the leuders muQugers uQd HP persRQQel Rf cRmpuQles thut must huve lQterculturul cRmpeteQc\. HRwever lt
uppeurs thut cRmpuQles ure QRt lQvestlQg eQRugh lQ lQterculturul Rr fRr thut mutter uQ\ trulQlQg.
IQ the BuslQess EQerg\ 6urve\ where 1500 muQugers were surve\ed RQl\ u thlrd hud recelved trulQlQg lQ the lust 12
mRQths. If muQugemeQt ls recelvlQg such lRw levels Rf suppRrt RQe cuQ ussume thut Rther fuQctlRQs ure recelvlQg us much
Rr eveQ less.
67(36 72 AV2ID FAILUP( 0(5G(56
Desplte mRQths Rf wRrk mllllRQs Rf dRllurs lQ fees uQd u flrm cRQvlctlRQ thut the truQsuctlRQ mukes ull the seQse lQ the
wRrld \Rur merger ls gRlQg dRwQ lQ flumes. 7he twR cultures ure QRt meshlQg. Ke\ tuleQt ls heudlQg fRr the dRRr. AQd
ever\RQe kQRws lt.
2Qe Rf the sRlutlRQs put fRrwurd E\ reseurchers ls tR stud\ ucqulsltlRQ survlvul. AQ ucqulsltlRQ ls regurded us successful lf
Rver u certulQ perlRd Rf tlme (geQerull\ severul \eurs) lt hus remulQed lQ the huQds Rf the ucqulrlQg flrm. 6tudles RQ
survlvul cRQflrm the prevlRusl\ REtulQed results lQ Rther wRrds u fullure rute Rf EetweeQ 50 uQd 75%. DlvestmeQt us u
success crlterlRQ pRses u mu|Rr prRElem hRwever lf uQ ucqulsltlRQ ls sRld Rff ut the eQd Rf 4 \eurs wlth u lurge prRflt cuQ
we reull\ cRQslder lt us u fullure? 2EvlRusl\ QRt.
7here ure sRme truQsuctlRQs such us the murrluge Rf H3 uQd CRmpuq whlch ure trRuEled frRm the sturt. 7heres llttle
uQ\RQe cuQ dR. FRrtuQutel\ thls ls fur frRm the QRrm. 0Rre thuQ twR-thlrds Rf truQsuctlRQs thut full dR sR ut the executlRQ
stuge. DulmlerChr\sler fRr exumple Qeglected eurl\ RQ tR estuEllsh u prRper set Rf guldlQg prlQclples Eused RQ the
mergers struteglc lQteQt uQd theQ cRQtlQued tR mlsflre E\ fulllQg tR ullgQ leudershlp uQd lQtegrute the cultures Rf the twR
RrguQlzutlRQs.
BrlQglQg dlspurute grRups Rf peRple tRgether us RQe cRmpuQ\ tukes reul wRrk uQd represeQts uQ effRrt thut ls RfteQ lurgel\
RverlRRked. Culture chuQge muQugemeQt ls QRt lQdulgeQt; lt ls u crltlcul uspect Rf uQ\ truQsuctlRQ. HRwever slmpl\
uckQRwledglQg the lssue Rr huQdlQg lt Rff tR speclullsts ls QRt eQRugh. 0uQugemeQt must set u vlslRQ ullgQ leudershlp
urRuQd lt uQd hRld suEstuQtlve eveQts tR glve emplR\ees u chuQce tR purtlclpute. Detulled uctlRQs uQd well urtlculuted
expectutlRQs Rf EehuvlRr cRQQect the culture pluQ tR the EuslQess gRuls.
CRmpuQles must sturt tR EecRme mRre uwure Rf these deflcleQcles uQd thelr pRsslEle future lmpucts. If the mergers uQd
ucqulsltlRQs Rf the future ure tR prRve frultful cRmpuQles must deslgQ uQd lmplemeQt cRmpreheQslve lQterculturul trulQlQg
prRgrums fRr stuff; ussess uQd tuckle pRsslEle ureus Rf lQterculturul dlfflcultles prlRr tR durlQg uQd ufter mergers uQd put
lQtR pluce mutuull\ ugreeuEle lQterculturul frumewRrks Rf uQderstuQdlQg tR uct us guldellQes fRr pRst-merger s\Qerg\.
These tusks shRuld QRt Ee seeQ us reuctlve dumuge llmltutlRQ exerclses Eut us u pRsltlve prRuctlve meuQs Rf creutlQg
cRheslRQ muxlmlzlQg efflcleQc\ uQd EulldlQg u cRmpetltlve udvuQtuge.