Hard Facts: Mergers

Back in December Nancy Lebovitz commented here that the book Hard Facts, Dangerous Half-Truths And Total Nonsense: Profiting From Evidence-Based Management “may be may be of interest to any contrarian”  She is quite right.  So much so that I will do a series of posts quoting from it. Here is Hard Facts on mergers:

Study after study shows that most mergers – some estimates are 70 percent or more – fail to deliver their intended benefits and destroy economic value in the process.  A recent analysis of 93 studies covering more than 200,000 mergers published in peer-reviewed journals showed that, on average, the negative effects of a merger on shareholder value become evident less than a month after a merger is announced and persist thereafter. …

More thoughtful leaders might do what Cisco Systems has done – figure out the factors associated with successful and unsuccessful mergers and then actually use those insights to guide behavior.  … A Fortune article on bad mergers noted that “infrastructure giant Cisco has digested 57 companies without heartburn.” … Cisco figured out that mergers between similar sized companies rarely work, as there are frequently struggles about which team will control the combined entity.  … Cisco’s leaders also determined that mergers work best when companies are geographically proximate, making integration and collaboration much easier. … and they also uncovered the importance of organizational cultural compatibility for merger success.  …

You might think that companies would learn from all this experience … you would be wrong.  Business decisions … are frequently based on hope or fear, what others seem to be doing, what senior leaders have done and believe has worked in the past, and their dearly held ideologies – in short on lots of things other than the facts. (pp. 4,5)

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  • Sam Schulman

    A moment’s thought would indicate that a huge percentage of all business decisions – decisions to acquire or divest, decisions NOT to acquire or divest, to raise prices or cut them, to expand or contract production, to hire a particular employee or to expand employment in general, or to downsize – fail, in the sense that they do not deliver the benefits that they promised – or indeed, produce the opposite result, and to some degree – if only in opportunity cost – “destroy ecomomic value.” Anyone in business would agree that the figure of a 70% failure rate for most such decisions is not unrealistic.
    So why should mergers be any different?
    This is a rare instance in which you find an utterly trivial observation remarkable, Robin. This happens with you far less than 70% of the time.

    • http://blogjack.net Glen Raphael

      Agree. Companies have to make lots of decisions and place lots of bets; most won’t pay off but a few will. It’s not even clear from the quote that mergers on the whole produce net negative value – you’d need to balance the *magnitude* of the benefits and harms – but it wouldn’t be surprising if they did.

      I can think of two other relevant factors that could make mergers a warning sign. It boils down to the fact that *mergers are painful*. Undergoing a merger means disrupting to some degree your normal productivity and wasting a lot of management time on paperwork that doesn’t in itself help the company succeed.

      Hypothesis #1: Companies merge when they’re in a “Hail Mary” pass situation. When the normal business model is in such trouble that merely executing on that is no longer an option or no longer a good option.

      Hypothesis #2: Companies merge when they are top-heavy. There are more managers than needed to solve the problems the company has so management – rather than shrinking to an appropriate size – goes out and creates new problems to keep everyone busy.

      #1 says some of the calculated “negative effect of mergers” is really a selection bias – the merger might be a symptom of less than it is the cause of the problems that show up a month later.

      #2 puts mergers in essentially the same category as constructing an impressive new office building for the company.

  • Vladimir

    I believe you meant “series” in place of “serious.” Although your posts are serious.

  • nelsonal

    Principle agent problems too. Managers are paid by firm size so every merger is a success, so long as it’s not so bad that the investors remember how poorly the combined firm does compared to promised results.

  • Doug S.

    Yep. When two companies are about to merge, short them! ;)

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