Last Updated Jan 7, 2009 10:15 AM EST
Odds being what they are, why do companies do it in the first place? Are they worth the risk? Are CEOs who propose big mergers idiots?
Well, companies merge because the whole is supposed to be greater than the sum of the parts. In other words, they do it for strategic reasons, but operating synergies are supposed to result, as well. In theory, shareholder value should increase. If not, then the merger failed.
Speaking of failed mergers, here are 10 examples of various sizes, off the top of my head:
- AOL - Time Warner ($164B)
- MCI - WorldCom ($42B)
- Daimler Benz - Chrysler ($37B)
- Sprint - Nextel ($36B)
- HP - Compaq ($25B)
- JDS Uniphase - SDL ($13B)
- Alcatel - Lucent ($11B)
- Excite - @Home ($6.7B)
- Mattel - The Learning Company ($3.5B)
- Borland - Ashton Tate ($440M)
Why do mergers fail?
Unfortunately, mergers are inherently risky. For every way to do them right, there are probably 10 ways to do them wrong. Here are my top 10 most common, preventable merger failure modes. Just one is enough to spell doom, but many mergers suffer from several:
- Flawed corporate strategy for either or both companies
- One company sugarcoats the truth; the other buys a PowerPoint pitch
- Sub-optimum integration strategy for the situation
- Cultural misfit, loss of key employees after retention agreements are up
- Acquiring company's management team inexperienced at M&A
- Flawed assumptions in synergies calculation
- Ineffective corporate governance, plain and simple
- Two desperate companies merge to form one big desperate company
- CEO of one or both companies sells the board and shareholders a bill of goods
- An impulse buy or panic sell gets shoved down the board's throat
That's what the due diligence process should be about, instead of just shielding executives and directors from shareholder litigation. The boards (not officers) of merging companies should hire objective business consultants or other disinterested parties - not just lawyers, bankers, and accountants - to scrutinize mergers for their probability of increasing shareholder value. Why they don't do that as a matter of course, I have no idea.
Look, this is actually pretty simple. Mergers are high risk, but they're treated by executives and directors as if they're no brainers. That's a big disconnect that hurts everyone - shareholders, managers and employees - big-time. It really makes you wonder, doesn't it.