Why Do So Many Mergers and Aquisitions Fail?
A Strategy and Restructuring Practitioner Gives Some Answers.

Dr. Fritz Kroeger

The speaker began with a litany of numbers.

Between 1997 and 2000, there were 34,000 mergers and acquisitions in the United States. Last year alone, there were 9,602, a U.S. and worldwide record. The value of the deals announced last year in the U.S., $1.4 trillion, would have been a record except for the fact that the year before the total value was $1.45 trillion.

But the number that seemed most shocking was 58 percent. That's the number of all mergers and acquisitions that fail to reach the goals they set out to achieve. They fail to increase the merging companies' stock prices. They fail to increase their profitability. In fact, in a very high number of cases, mergers and acquisitions actually decrease those figures substantially.

Why this is happening is a question that the global management consulting firm, A.T. Kearney, has been working on for several years with their global post-merger (PMI) research. On hand at the Spring Seminar to talk about that research and what it suggested was Dr. Fritz Kroeger, vice president and head of A.T. Kearney's Berlin office. His consulting specialties include growth strategy, mergers and acquisitions, post-merger integration and restructuring.

Kroeger said their most recent study of 230 merging or acquiring companies showed that less than one-third of the companies saw an increase in profitability after their mergers. Fourteen percent saw no change while 57 percent saw a decrease in their post-merger profits. Shareholder value is a similar story. About 60 percent of all merging companies experienced a drop in stock prices - this at a time when it seemed that the only direction stock prices went was up.

So why do so many deals go bad? Kroeger said there are "seven deadly sins" associated with post-merger integration that can contribute to the failure of a merger or acquisition.

"The first 'deadly sin' is to mistake a superficial corporate fit for an effective corporate vision," he said. Although "fit" is probably mentioned in the first paragraph of every article written about mergers, most experts agree that fit is never enough to ensure a successful merger. "But," Kroeger said, "it is, all too often, enough to launch one."

There are three reasons why fit is never sufficient for success, he said. First, "fit" oversimplifies and often delivers little more than a sound bite. The harmonization of two companies is a very complicated task. Second, "fit" says nothing about growth, about where a company is supposed to be heading, how much it will grow and how it will achieve that growth. Third, "fit" only matters when clear vision and sound strategy are in place. Successful mergers are those that put corporate vision first and corporate fit second.

The second deadly sin is to not move quickly enough when the leadership team is established. "Leadership is the most urgent priority when a merger closes," Kroeger said. "A merger without strong leadership in place from its earliest days - and preferably before its early days - will drift quickly." And drift is deadly because it allows simmering conflict, unresolved decisions and anxiety to fill the leadership vacuum.

The third deadly sin of post-merger integration is to focus on cost-cutting alone, rather than growth. While mergers offer opportunities to save money by cutting duplicated costs, Kroeger said, "Too many newly merged companies focus on cost reduction and operational improvements and fail to find ways to increase value through market synergies and growth. They lose sight of a central fact: You merge to grow."

The fourth merger mistake is to focus on job cuts, factory closings and other cost-cutting moves as "early wins" of the merger process. "Such moves often backfire," Kroeger explained, "and add to the uncertainty that spreads quickly after a merger is announced. 'Early wins' are those things that back up your words with actions and that show that improvement is coming."

The fifth deadly sin involves one of the most intractable problems facing any merger, namely, overcoming differences in corporate culture. "Our studies show," Kroeger said, "that in most mergers, the larger or acquiring partner simply attempts to impose its own corporate culture on the other partner. This approach, while valid in some cases, can destroy the value the merger was supposed to create if it is implemented badly."

He added that there must be clear reasons for imposing a new culture, and the new culture must be more appropriate to the business environment than the old one. Where two organizations serve very different markets or segments, it is often best, he said, to leave the cultures separate and intact.

The sixth deadly sin of merger failure, Kroeger continued, is a familiar one, "a failure to communicate." This probably should be number one on the list, he said, because their survey shows that 86 percent of the companies in the study admit they failed to communicate sufficiently in the merger integration phase. The most commonly reported barrier to successful merger integration was cited as failure to achieve employee commitment.

"The success of post-merger depends largely on how well managers can persuade constituencies to believe in a vision and act to bring it about," Kroeger said. "This is a communications task, pure and simple. But it doesn't just happen. It must be planned, controlled and carried out with commitment. Our research clearly shows that good communications campaigns increase the likelihood of gaining internal and external buy-in, including obtaining good stock performance."

The seventh sin, Kroeger said, is lack of risk management. "More than two-thirds of the merging companies surveyed used no formal risk management program during their merger process. Without an organized way to recognize and deal with risk, companies are likely to overlook it."

With 80 percent of the merger and acquisition deals in the last decade never creating the value that managers and shareholders expected, why do so many smart people and smart companies keep bellying up to the merger table? "Maybe it's the same reason people get married," Kroeger concluded, "the triumph of hope over experience. But it doesn't have to be this way. The reality after the merger can fulfill the hopes of the merging partners. The trick is going into them with your eyes open."