Executive Summary
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Mergers and acquisitions (M&A) are increasing in frequency, yet at least half fail to meet financial expectations.
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The United States and the United Kingdom continue to dominate M&A activity. As the number of cross-border deals increases, however, many other national players are entering the field, further highlighting the issue of cultural compatibility.
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Financial and strategic factors alone are insufficient to explain the high rate of failure; greater account needs to be taken of human factors.
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The successful management of integrating people and their organizational cultures is the key to achieving desired M&A outcomes.
Introduction
The incidence of M&A has continued to increase significantly during the last decade, both domestically and internationally. The sectors most affected by M&A activity have been service- and knowledge-based industries such as banking, insurance, pharmaceuticals, and leisure. Although M&A is a popular means of increasing or protecting market share, the strategy does not always deliver what is expected in terms of increased profitability or economies of scale. While the motives for merger can variously be described as practical, psychological, or opportunist, the objective of all related M&A is to achieve synergy, or what is commonly referred to as the 2 + 2 = 5 effect. However, as many organizations learn to their cost, the mere recognition of potential synergy is no guarantee that the combination will actually realize that potential.
Merger Failure Rates
The burning question remains—why do so many mergers fail to live up to stockholder expectations? In the short term, many seemingly successful acquisitions look good, but disappointing productivity levels are often masked by one-time cost savings, asset disposals, or astute tax maneuvers that inflate balance-sheet figures during the first few years.
Merger gains are notoriously difficult to assess. There are problems in selecting appropriate indices to make any assessment, as well as difficulties in deciding on a suitable measurement period. Typically, the criteria selected by analysts are:
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profit-to-earning ratios;
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stock-price fluctuations;
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managerial assessments.
Irrespective of the evaluation method selected, the evidence on M&A performance is consistent in suggesting that a high proportion of M&As are financially unsuccessful. US sources place merger failure rates as high as 80%, with evidence indicating that around half of mergers fail to meet financial expectations. A much-cited McKinsey study presents evidence that most organizations would have received a better return on their investment if they had merely banked their money instead of buying another company. Consequently, many commentators have concluded that the true beneficiaries from M&A activity are those who sell their shares when deals are announced, and the marriage brokers—the bankers, lawyers, and accountants—who arrange, advise, and execute the deals.
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