Ma Failure Costs

The cost of failure is significant. According to Fortune magazine, thirty years of M&A activity has resulted in an average of 3 percent loss of equity. Other direct "hard" failure costs include:

Lower Share Price

• Over the last three decades, almost 17.5 percent of merger acquiring firms lost more than 5 percent of their value upon announcement of the merger, while only 11 percent had corresponding positive returns (AMS, 2001).

• The average acquirer lost almost 4 percent of its value (3.8 percent) in the medium term as a result of the merger (Andrade, Mitchell, & Safford, 2001).

• In deals financed by the issuance of equity, acquiring firms lost over 6 percent of their value over the medium term as a result of the announced merger (Andrade, Mitchell, & Safford, 2001).

• A Journal of Economic Perspectives report (Andrade, Mitchell, & Safford, 2001) using a sample of mergers from 1961 through 1993, showed that, in the three years following the merger point, estimates of abnormal stock price reactions are quite negative: —5 percent for an equal-weighted portfolio of firms (—9percent when the deal was financed with stock), and —1.4 percent for a value-weighted portfolio. In addition, growth firms underperform by an average of — 6.5 percent equal-weighted and —7.2 percent value-weighted.

Excessive Acquisition Premiums

• Acquirers pay premiums that average as much as 25 percent (Andrade, Mitchell, & Safford, 2001, and many others), indicating that most if not all of the economic benefits of mergers accrue solely to the shareholders of the target firm and not to the acquirer owners.

Decreased Profitability

• Approximately 60 percent of mergers result in lowered profitability for as long as seven years post-merger, compared to a control group of non-merger firms (Schenk, 2000).

Changes in Productivity

• McGlickin and Nguyen (1995) report that, while industrial acquirer plants show increased productivity in the short run, acquirer plants endure longer term productivity losses. AMS (2001) and Schoar (2002) point out that the net productivity gain for mergers is thus zero on average.

Loss of Market Share

• Some research asserts that acquired firms involved in mergers lose 75 percent of their pre-merger market shares on average, compared to firms in the same industry that were not acquired (Mueller, 1986).

Bad Bidders Become Good Targets

• Stock price reactions of acquirer firms whose acquisitions were subsequently divested (likely failures) are reliably and strongly negative (about —4 percent of firm value) (Mitchell & Lane, 1990), indicating that the market often punishes firms for making bad or unsuccessful merger decisions.

• In addition, acquiring firms that are unsuccessful themselves become targets, and the market appears to sense this. Firms whose acquisitions result in divestitures and who subsequently become targets lose about 7 percent on average at the initial announced merger. About 40 percent of these bad bidders soon become acquisition targets themselves, according to Mitchell and Lane (1990).

Indirect "soft" costs of failure or ineffective integration are significant as well, and include:

Lack of External Focus on the Customer, Competition, and the Marketplace

• News of a merger or acquisition attracts attention and can prove unsettling to customers and the financial community. Competitors can take advantage of this turbulence and actively market and sell on the basis of it. At the precise time when strong external focus is essential, the acquiring and target company can become distracted by the complex internal issues of integration and fail to focus sufficiently on their external stakeholders.

Low Staff Motivation and Morale

• In most mergers and acquisitions, the rumor mill accurately runs months ahead of any formal corporate communication about a merger or acquisition. Meetings of executives between the two companies, visits by consultants, and requests for documentation are all evidence that something is going to happen. As staff hear the rumors and business news reports, speculation runs rampant in both companies. Absent any formal communication on the merger or acquisition about what will happen, why, when, and how, survey after survey indicates widespread anxiety, loss of motivation, and decreased morale—all with serious negative impact on performance and service levels.

Loss of Key Executives—Nearly Half Within Three Years

• One observable indicator of a pending merger or acquisition is the daily arrival—morning and afternoon—of the Federal Express truck delivering documentation from executive recruiters and picking up the completed documentation from key executives. Again, the news of a merger or acquisition creates a window of opportunity for competitors to take advantage of a period of uncertainty and to poach executive talent away from the acquiring or target company. Research indicates that up to half of the executives in firms involved in a merger or acquisition leave within three years (Galpin, 2000).

Loss of Key Staff—Many Long-Serving High Performers and Informal Leaders

• In times of organizational upheaval—as with a merger, acquisition, or other large-scale change—if communication about the change (specifically about staff reduction, reassignment, or relocation) is not handled well, the best and brightest leave first. Obviously, the more talented, technically competent, and experienced are the most in demand in the marketplace, and they find little difficulty in obtaining a new job—often with the competition and at significantly higher compensation. This can represent a serious "brain drain" in areas of technical expertise, with replacement being costly and time-consuming. The antidote to this problem is disclosure—as early and as full as possible—about the architecture of the merger or acquisition and the reasons behind it. This is especially true in the case of key staff, who should be helped to see clearly the new vision and strategy and the opportunities it represents for them in the new company.

Brand Confusion—Loss of Brand Focus

• Often in mergers and acquisitions, one of the brands goes away. In the case of the merger of Bank of America and Nations Bank, even though Nations was the acquiring company, the corporate brand became Bank of America because of its global brand recognition. When First Union and Wachovia merged, the decision was to operate through 2003 under both brand names, and then take on the strong Wachovia brand, even though First Union was the larger of the two organizations. First Union became the corporate brand except in certain areas like the securities business, where Wachovia had better brand recognition. With the Hewlett-Packard and Compaq merger, the new company assumed a new brand identity as hp, except for certain Compaq products well-known in the PC marketplace that continue to carry the Compaq brand. All of this can be very confusing and emotional, especially to the target company whose staff feel a real sense of loss of identity. Customers perceive this lack of brand focus and confusion as indicators that there is no real commitment to the merged operations, and again an advantage for competitors is created. The logic and business rationale of re-branding, selective branding, and product line consolidation should be made clear early in the communication process.

Decreased Customer Service Levels and Satisfaction

• All of these factors and more can contribute to significantly decreased levels of customer satisfaction. Integration problems, if not properly anticipated, can unintentionally put barriers in the path of customer service—as with conversion to a new telephone or e-mail system, consolidation of customer data bases, integration of billing systems, and so forth. All the customer knows is that telephone calls are not returned promptly, e-mail messages are kicked back, and billing errors are frequent and difficult to resolve. All too often, customer focus is lost due to a poorly planned and inefficient integration. No one is talking to the customer about the merger or acquisition prior to the fact about new customer benefits or checking with the customer during the integration process. Even key accounts are left unattended and vulnerable to the competition.

Given this dismal history, there have been numerous studies to ascertain why the merger and acquisition record is so poor. In The Synergy Trap, Mark Sirower, (1997) places part of the blame on the payment of excessive acquisition premiums for the alleged synergies that will be gained in the future by the new organization. He also points out that, above all, speed is of the essence in the merger and acquisition process, in that—given the value of money over time—time really is money. But while this excessive premium cost may well be a major factor, it is not the primary cause of the high failure rate.

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