2014 was the best year for mergers and acquisitions since 2008, according to the FT, even though with the collapse of Pfizer’s proposed takeover of AstraZeneca the value of deals that failed to complete in the year was the highest since 2008.
What we also know from research is that many M&As that do complete still fail. For all stakeholders, not least executives responsible for managing change, it is important to understand why this is.
Researchers at the Indian School of Business (ISB) made a series of detailed comparisons in 2009 between successful and failed M&As to tease out some of the factors critical to deal success and to reveal common themes that lead to success or failure.
Krishnamurthy Subramanian, Assistant Professor of Finance, describing the research findings in an article in ISB Insight, said a merger or an acquisition only makes sense “if it leads to certain operational and/or financial advantages that the individual entities could not harness by themselves, thereby creating value for shareholders of both protagonist firms.”
Sadly such synergy does not always happen in fact as the article asserts “firms invariably overestimate possible synergies… As a result, acquirers lose value on average while the targets rake in the moolah.”
ISB students on an elective course on Corporate Control, Mergers and Acquisitions, used frameworks learnt in class to pick and contrast a successful deal with a failed one, to separate credible sources of synergies from the dubious ones. The key findings were:
M&As undertaken with the intention of increasing market share can be value enhancing if the deal leads to one or more of the following: (i) increases the firm’s pricing power vis-à-vis competitors; (ii) enhances the combined entity’s bargaining power with customers and/ or suppliers; and (iii) is instrumental in enacting entry barriers.
When firms merge to sell multiple products using a set of common distribution channels, and thereby reap operational synergies, consolidation of such channels leads to greater success compared to attempts at combining diverse kinds of distribution channels.
Revenue synergies stemming from cross-selling of the acquirer’s products to the target’s, and vice versa are often unduly aggressive. Assumptions relating to cross-selling of products must be carefully scrutinized by senior management.
When financial synergies stemming from tax benefits are the motivating factor in a deal, thorough due diligence must be undertaken to ensure that the value generated from tax savings is not dwarfed by value destruction in other parts of the deal.
Since people make or break a deal, key personnel in both combining entities must be identified. Furthermore, compensation and incentive schemes must be designed so as to ensure that key personnel in both companies are retained.
Last but not the least, adequate attention must be paid to cultural integration to provide a suitable environment to realize synergies.
In the article Subramanian describes two cases from the research which highlight the underlying assumptions of the firms approaching the deals, the projected synergies and the differences in implementation which led to success in one case and failure in the other:
ArcelorMittal and DaimlerChrysler
“With careful planning and excellent execution, ArcelorMittal turned out to be a success while DaimlerChrysler remained mired in various cultural, operational and financial issues.”
United Spirits Limited and Quaker Oats’ Mergers
“United Spirits Limited’s phased acquisition of Shaw Wallace & Company was a runaway success… On the other hand, Quaker Oats’ acquisition of Snapple could be dubbed one of the classic disasters in the history of M&A…”
Read the full article: Value Creation in Mergers and Acquisitions
About Professor Krishnamurthy Subramanian
Executive Education at the Indian School of Business