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

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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.

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

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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.

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