Comments on: Hard Facts: Mergers

By: Bob Geren and effective management – Kevin Burke

Bob Geren and effective management – Kevin Burke — Thu, 09 Jun 2011 21:03:22 +0000

[...] instead of telling stories or anecdotes. If you’re new, check out Hard Facts, their book on evidence based management, first. Jun 9th, 2011 by kevin. Tagged: bob geren · management · oakland [...]

By: Glen Raphael

Glen Raphael — Mon, 15 Mar 2010 14:17:24 +0000

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.

By: Doug S.

Doug S. — Tue, 09 Mar 2010 04:44:32 +0000

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

By: nelsonal

nelsonal — Tue, 09 Mar 2010 03:45:25 +0000

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.

By: Vladimir

Vladimir — Tue, 09 Mar 2010 03:15:19 +0000

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

By: Sam Schulman

Sam Schulman — Tue, 09 Mar 2010 01:17:00 +0000

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.