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Why We Keep Coming Back for Mergers Even Though They Don't Work


New merger booms always have their doubters, and the present cyclical upsurge is no exception.

Yes, Most Mergers Will STILL Fail

Is it really safe to jump into the merger pool? History suggests that the answer is "mostly no" as evidenced by more than 20 articles and papers indicating that two-thirds or more of all deals "fail" based on the criteria those researchers applied.

But can companies do better? With spectacular merger missteps such as Bank of America Corp (NYSE:BAC) /Countywide Financial, Hewlett-Packard Company (NYSE:HPQ)/Autonomy and Royal Bank of Scotland Group plc (NYSE:RBS)/ABN Amro all in recent memory, every wannabe acquirer gives lip service at least to prudent acquisition practices for the next deal: determining whether the financial return from the deal justifies the outlay (rather than total reliance, nebulous, subjective notions such as "strategic fit"), and assessing whether the acquisition purchase premium (APP) - referring to the amount that has to be paid above the target company's share price in order to close the deal - is mostly backed by achievable synergies: post-merger improvements.

Whether or not such prudence is real or continues yet to remain. Figure 2 shows how modest merger activity in early phases of M&A cycles past and present quickly become runaway buyers-panic bubbles, especially as late arrivers to the party scramble to make up for lost time.

As the current merger cycle marches through its second phase (of four), merger activity is no longer a matter of business media speculation, but rather, is confirmed by companies own acquisition war chests. In October 2012, 3M Co (NYSE:MMM) closed its biggest deal in two years and in the May 2013 declares that more deals are on the horizon.

This month, following speculation about its pursuit of Spain's Telefonica, telecommunications giant AT&T Inc. (NYSE:T) openly admits to what the financial market had already suspected for months: earnest pursuit of international deals, especially those involving next generation 4G mobile technology.

Steady, moderate acquirer John Chalmers of Cisco Systems, Inc. (NASDAQ:CSCO) endures as a poster boy for this acquisition boom, in stark contrast in terms of both style and substance to the pop-biz media stars of M&A bubbles past, such as Jean-Marie Messier of Vivendi or Jurgen Schrempf of Daimler AG (OTCMKTS:DDAIF). Firms such as Cisco, 3M, Apple Inc. (NASDAQ:AAPL) and PepsiCo, Inc. (NYSE:PEP) typify merger prudence for others in the new boom: generally (but not always) smaller-sized deals, closely aligned with areas of existing or emerging strength in those organizations, justified on a hard numbers basis, and acquired at a price likely to be perceived by both the financial markets and their own boards as justifiable.

Merger Volume Will Still Increase, Even If Most Mergers Continue to Disappoint

For argument's sake, let's pretend that today, there will be no discernable improvement in overall merger performance in the present-merger wave, compared to the disappointments of last three post-1980 M&A cycles.

Does that mean that the newest merger boom will sputter and crash, as acquirers become timid and/or scared again? Despite the reality that most mergers STILL fail, the answer to that question is "no" (at least over the next few years) for reasons including:

I'm the exception. Wannabe merger dealmakers, consultants and advisors try to turn lemons into lemonade, acknowledging that most mergers disappoint, but that they're just the guys to help find the one-third of transactions that are viewed as successful nine months after the close.

Looking for alternatives. Holding cash and near-cash means close to zero returns, and even less, if new indications of return of modest inflation persist. The acquiring firm's easy areas for organic growth, such as product line extension and expansion into contiguous geographic areas, are quickly becoming used up. What's left? External investment, usually referred to by its other name: mergers.

Spending imagined wealth. Never mind that in broad-based stock market booms such as the rally since late 2010, prices of ALL companies tend to rise, acquirer and target alike. The corporate fiction - and the sense on the board - persists that "we should do something to take advantage of our high stock price." A likely target? Another company.

Acquiring company CEO hubris. Presiding over a major acquisition during his or her period as company CEO remains as a driving force, admitted or not. Faced with a reality that only around a third of deals succeed, the super-confident new chief executive has little doubt of his/her own ability to beat the odds.

Peter J. Clark is a lecturer of management science and innovation at University College London. He is co-author of the forthcoming book Masterminding the Deal: Breakthroughs in M & A Strategies and Analysis. The above figures come from Peter's forthcoming book Masterminding the Deal: Breakthroughs in M&A Strategy and Analysis.

This story by Peter J. Clark originally appeared on Quartz.

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