Why Too Many Merger and Acquisition Efforts Fail

Those who advocate mergers will argue that they’ll cut costs or boost revenues beyond that needed to justify a price premium. It makes since doesn’t it: reduce redundant systems, take advantage of economies of scale, put a larger sales force on the streets and eliminate redundant or over-abundant job functions. The resulting whole has to be more profitable than the sum of its previous parts. The concept of synergy sounds great in theory, but in practice, Mr. Murphy always seems to be on everyone’s payroll because it’s no secret that more than a few mergers don’t live up to expectation.

Historically roughly two thirds of large, well hyped mergers don’t meet pre-merger expectations. What this means is they will fare poorly on the stock market. The motivations that drive mergers can be flawed and efficiencies from economies of scale may prove elusive. In many cases, the problems associated with trying to make merged companies work are all too concrete.

Coping with a merger can make top managers spread their time too thinly and neglect their core business, spelling doom. Too often, potential difficulties seem trivial to managers caught up in the thrill of the big deal and the chances for success are further hampered if the corporate cultures of the companies are very different. It’s a mistake to assume that personnel issues are easily overcome.

But remember, not all mergers fail. Size and global reach can be advantageous, and strong managers can often squeeze greater efficiency out of badly run rivals. Nevertheless, the promises made by deal makers demand the careful scrutiny of investors. The success of mergers depends on how realistic the deal makers are and how well they can integrate two companies while maintaining day-to-day operations.

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