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