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Overcoming Bias Commenter's avatar

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.

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Ronfar's avatar

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

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