Merger_and_Aquisition_Failure

M&A Failures University of Phoenix September 25, 2009 Why M&A’s Fail Mergers and acquisitions are prevalent in our society. It seems every day you can open the paper and read about another merger or acquisition. From 1982 to the year 2000 “the pace of merger activity rose to unprecedented levels.” (Weston &Weaver, 2001) The role of these mergers is to allow firms to effectively operate in the wake of new challenges and opportunities. M&A’s can increase revenue, market share and improve shareholder satisfaction. In contrast, with all of the movement of mergers, there can also be great failure. Not all mergers are successful and it is important to understand why this occurs. Failures of mergers can be a teaching tool for future organizations in light of potential merger activity. Technology integration is critical in the success of a merger. Failure to successfully complete integration between two organizations can also result in the failure of the ensuing merger. Integrating information systems has proven to be the toughest post deal challenge. Misconception is that once the merger has been finalized it will be successful, but that is far from the truth. Just as in a company that is starting up and working off of their strategic plan, without the follow up and reassessment of what needs to be done it can still fail. Culture shock is often another reason for failure. A merger is like a marriage as companies need to have communication, flexibility and mutual respect. Within a merger organizations blend values, traditions, beliefs, and priorities. The leadership of the CEO is critical. In order to have the entire organization on board, the CEO must lead and show their employees the benefits of the merger and the CEOs interest in the human capital involved. Not structuring a merger deal or lack of negotiating how it will be handles post agreement is another reason for failure. Lack of synergy is what is caused and can cripple an organization creating a failing atmosphere for any merger. Other reasons for failure are; faulty evaluation, diversification, incomplete due diligence and overleveraged. Failure of a merger or acquisition is unfortunately a greater chance than success. There is much to consider in the failure of a merger, the implications are greater than two organizations not being able to succeed as one. When a merger fails, shareholder confidence sinks. This in turn will cause the market share to fall. It becomes a vicious cycle of defeat. Market position falls as well. The market share of one or both companies will diminish as well. There are companies who can make the best of the failure and maintain their standing within their company. There are multiple types of restructuring. A spin off is one example. It is defined as a “pro rata distribution of shares in a subsidiary to the existing shareholers of the parent.” This restructuring creates a companiy that is completely separate from the parent company and is publically traded. In 1984 Baby Bells was involved in a spin off with AT&T. AT&T shareholders received one share of each Baby Bell for every 10 shares of AT&T. In September Lucent with AT&T was involved in a spin off. In this agreement, AT&T holders got .324 shares of Lucent for each share of AT&T. In December of that same year NCR and AT&T were involved in a spin off. AT&T shareholders got .0625 share of NCR for each share of AT&T. A spin off is a great way to streamline operations and sell off less productive or unrelated subsidiarys. The companies that are spun off are worth more as independent companies than as a part of the larger company. Another type of restructuring is liquidation. Liquidations are both voluntary or involuntary. Involuntary liquidations are sometimes caused by creditors forcing a firm to do so in order to pay it’s debt. Often companies are worth more “dead than alive.” Voluntary liquidations are more positive. Within these liquidations the firm can be sold in parts or as a whole. The goal is to sell for more than the market value of the firms securities. Voluntary liquidations have the characteristics of divestitures and spin offs yet I feel that the liquidation is the better restructuring move if the company is able to liquidate. Mergers and acquisitions occur when one company is completely absorbed by another corporation. The surviving company assumes all rights, liabilities, and privileges of the merged company. Mergers and acquisitins are governed by both state and federal laws. It is also imperative that anti trust reglations are followed. With the percentage of failed mergers being so high it is key that companies negotiate and prepare for any mergers that they may be interested in. It will be interesting to follow the activity of mergers and acquisitions as our economy begins to turn around. References Weston, J. Fred., & Weaver, Samuel. (2001). Mergers & Acquisitions. New York: McGraw Hill. Weston, J Fred., Mitchell, Mark., & Mulherin, J Harold. (2004). Takeovers, Restructuring, and Corporate Governance (4th ed.). Upple Saddle River, NJ: Pearson.