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