Mergers & Acquisitions – Only a few are blessed

Mergers and acquisitions in daily news may not be major show stoppers yet but when announced some critics do question why not withstanding the hype and razzmatazz they do not always succeed as planned.  Recently there was the announcement of a mega mobile deal concerning the marriage of two giants; AT & T and T-Mobile USA from Deutsche Telekom for a cool $39 billion.  This acquisition is being objected to by US federal government approval and recently the Department of Justice had a filed suit to prevent the planned merger. AT & T has announced its intention to fight against the decision of the Justice Ministry. If the deal is going to fall through, the U.S. company has to pay a three billion dollars compensation to T-Mobile. Not a happy ending.  Ironically invited guests at the wedding are hopeful that the couple gets the nod to tie the knot.

If clearance comes through the acquisition by AT & T will make it a dominant player in the US, giving it a total of 129 million subscribers compared to Verizon with 102 million.  

Naturally there will be protests from lobbyists who oppose the creation of a dominant supplier.  Critics fear an overpowering position of AT & T in the mobile market.  Ironically, the pitfalls for mergers are high and one can recount a number of marriages that were not blessed in heaven.  A glaring example is the Daimler-Benz/ Chrysler merger which demonstrates the importance of solving cultural differences between the parties.  Here one can mention the culture clash between the American and German style of management.  In fact it was evident that the post-merger phase highlighted the difficulty of trying to integrate two very divergent cultures. One hopes that this is overcome in the AT & T and T-Mobile acquisition.

Back to the Daimler-Benz/ Chrysler case, the parties started their union blessed with good intentions.  They each vowed to remain faithful and solemnly expressed their commitment to work together and share work practices and product development methods.  Unfortunately for a number of reasons which we shall discuss later on, this commitment did not materialize.  It would be clearly manifest that uniformity was not achieved given Daimler management’s unwillingness to use Chrysler parts in Mercedes cars.

Still, there is no reason to say that all mergers fail.  One swallow does not a summer make but here we shall discuss some of the factors that contribute to failure.  Studies show that roughly two thirds of ‘big’ mergers will disappoint on their own terms, which means they will lose value on the stock market.  The motivations that drive mergers can be flawed and efficiencies from perceived economies of scale prove to be elusive.  It is true that due to the challenges of globalization many operators across the globe seek comfort in size, irrespective of internal problems that emerge.  Quietly they each go through many contortions to please one another.   Such sacrifices can be tolerated during a time of recession which exacerbated the drive to consolidate, hoping in the end to achieve cost cutting through economies of scale, strengthening the company’s market position, gaining access to new markets and retaining a talented workforce.  However, although mergers and acquisitions are aggressively pursued by companies, recent studies have indicated that 60-80% of all mergers are financial failures when measured by their ability to deliver superior returns.  

So what is the root of such a high rate of divorce among companies that walked the aisle leading to the coveted M & A altar?  The main cause is definitely flawed intentions.  The mismatch evidenced in a failed merger may often have its origins within management’s obsession for glory-seeking rather than an altruistic business strategy.  Thus we find the dominant CEO whose ego is boosted by buying the competition, is a common force in M&A, especially when combined with the influences from the bankers, lawyers and other assorted advisers who can earn big fees from clients engaged in mergers.  Post merger, there is additional stress among executives who try to cope with new cultures and in the end spread their time too thinly and neglect their core business.  Too often, potential difficulties seem trivial to managers caught up in the thrill of the big deal.  But what else can contribute to failure?  The answer is easy when one notes that chances for success are further hampered if cultural differences are not solved head on.  This could turn out to be a Human Resource nightmare.  Definitely it is no exaggeration to state that personnel issues are not easy to overcome.  For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code.  These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity.  Certainly the blessed mergers that succeed do outweigh the effort and expense incurred to make them work. On the other hand, a study by McKinsey ( a top consultancy ) shows companies often focus too intently on cutting costs following mergers resulting in reduced revenues, and ultimately lower dividends issued.  

To conclude the mergers that do prosper are worth a try as more often they are amply rewarded by advantages of size and global reach together with a healthier and more efficient operation.

George Mangion is a senior partner of an audit and consultancy firm, and has over thirty years experience in accounting, taxation, financial and consultancy services. His efforts have seen that PKF Malta has been instrumental in establishing many companies in Malta and placed PKF Malta in the forefront as professional financial service providers on the Island. George is a regular contributor to both local and foreign publications on business, financial services, taxation, mergers and acquisitions, company structure and insurance. He has also lectured and delivered presentations at numerous seminars and conferences worldwide, namely in Europe, South Africa, North and South America, Canada, Australia and the Caribbean.

George can be contacted at gmm@pkfmalta.com or on +356 21493041.