The following article was written by Dr.Justin Robinson and published in the Business Authority 18 February 2008 issue. The BU family would remember that the Doctor, who lectures at the University of the West Indies (UWI), has parted from his stuffy colleagues by coming to the blogs to educate the Barbadian blogosphere. His article is very relevant at this time given the recent announcement that the barrier to the disputed transaction involving Neal & Massy and Barbados Shipping & Trading has been lifted.
David – BU
Mergers and acquisitions (M&A) around the world continue to occur at a dizzying pace. Securities Data Co., Newark, N.J calculates that through mid-December they totaled a stunning $2.5 trillion for 2007. The urge to merge has also hit the Caribbean and Barbados as evidenced by a number of high profile take-over bids in recent years. While M&A remain one of the most popular mediums for corporate growth the available evidence suggests that the vast majority of M&A fail to create significant shareholder value.
Research studies by business academics and management consultants have repeatedly demonstrated that most mergers and acquisitions fail to accomplish their stated goals. In fact, the most common result of mergers and acquisitions is destruction of shareholder value. Depending on the research study being quoted, failure rates range from a low of 50% to a high of 80%. The most comprehensive study to date was published in November 2007 by AT. Kearney Inc., the Chicago-based management-consulting arm of Electronic Data Systems Corp. Having examined 115 multi-billion dollar mergers in manufacturing, finance, utilities, and services in the U.S.A. and thirteen (13) other countries, Kearney determined that 62% of mergers failed to create significant shareholder value. Another widely quoted study is the Boston Consulting Group report, published in June 2007. After analyzing three thousand two hundred (3,200) transactions the Boston Consulting Group concluded that sixty percent (60%) of M&A completed from 1992 to 2006 reduced shareholder value. These recent studies confirm the findings of a number of earlier academic studies and it is now generally agreed that perhaps as many as two-thirds of all acquirers fail to achieve the benefits planned at the outset of an acquisition.. The consistency of the research findings across a variety of studies is indeed a rarity in Social Science research, and should not be taken lightly.
Some of the failures have been quite spectacular and have involved some household names. The AOL- Time Warner, Daimler -Chrysler and the Boston Scientific – Guidant deals are often quoted as examples of the destructive impact of M&A on shareholder value. The Daimler- Chrysler merger has wiped out 12.6 billion dollars of market value while the Boston Scientific – Guidant deal destroyed about 18 billion dollars of shareholder value. AOL- Time Warner’s market value has declined by 95% since the merger was completed. Of course some get it right and reap spectacular returns. For example, Chevron’s shares have jumped seventy five percent in value since its 44 billion dollar takeover of Texaco. Bank of America shares have climbed 20 percent since the acquisition in 2004 of Fleet Boston Financial shares. Shares of Mittal Steel, now Arcelor Mittal, have risen 50 percent in less than a year after the company’s 38 billion dollar acquisition of Arcelor. Why is success so elusive in M&A? Why do so many get it wrong, and so few get it right? Who really benefits from M&A?
A critical issue is price. Study after study confirms that acquirers often pay too much for the target firms. This tends to happen in situations such as the Barbados Shipping Trading and the Life of Barbados takeovers where there are a number of competing firms. In such situations ego seems to triumph over sound analysis, and in their desire to win the takeover battle the acquirer ends up paying massive premiums to the shareholders of the target firms. Thus, shareholders in acquired firms tend to benefit from M&A. A large number of academic studies show that whenever a merger or takeover bid is announced, the share price of the target firm begins to rise and the share price of the acquirer begins to fall. The stock market thus seems to anticipate a transfer of wealth from the acquiring shareholders to the target shareholders. Despite the wealth of evidence the large deals abound. Ebay paid 2.6 Billion dollars for Skype and Microsoft paid 15 billion dollars for Facebook. One should note that neither Skype nor Face Book have ever made any profits. Investors seem to pay a high price for the hubris of top executives. Of course, the lawyers and investment bankers who advise top management and broker these deals profit handsomely from these deals.
The other major factor is post-merger integration. Many acquirers appear to seriously underestimate the costs and challenges involved in integrating the operations of the various entities involved. Integrating different information technology systems and inventory management systems has been consistently identified as a major challenge in post-merger integration. Reconciling disparate corporate cultures is also a major challenge that few firms seem to navigate well.
What then makes for a successful M&A? Nohria, Joyce, and Roberson of Harvard Business School, in their recent book “What Really Works,” outline the factors that enable the 20% minority of firms to successfully execute merger and acquisition strategies. The three key criteria are a mixture of marketing, product development, and organizational issues.
From a marketing and product development standpoint, the acquisition should either provide a new customer base in which to leverage existing products or provide new products to leverage to the existing customer base. One or both of these marketing or product development criteria must be met.
From an organizational standpoint, the acquiring firm should be able to integrate the new business unit. This is most successfully accomplished when the firm executes multiple small acquisitions rather than a few large deals. Thus, the two organizational criteria for successful acquisitions are that the acquired firm is relatively small and that the acquiring firm utilizes practiced managerial processes to identify and incorporate the new unit.
Carey and Ogden in their best selling book, “The Human Side of M&A, set out to examine the methods for integrating an acquisition that were employed by a subset of acquirers experiencing significant long-term, post-acquisition value increases. They found that these acquirers;
(1) performed careful due diligence not only on the easy-to-obtain financial numbers but also the sensitive and difficult-to-obtain information about people and culture;
(2) avoided acquiring organizations with distinctly different cultures than their own;
(3) created a third strategic vision based on a combination of those (employed/ pursued) by the two merging organizations;
(4) quickly identified, motivated, and retained key managers in the acquired company;
(5) integrated the two organizations deliberately and swiftly, promoting the best managers from each organization;
(6) timed their integration activities to avoid significant disclosure prior to regulatory approval of the acquisition while doing whatever necessary to “survive” a sometimes prolonged regulatory process, and
(7) strengthened their board by selectively drawing members from the boards of both organizations.
Given this backdrop of evidence, most executives and boards would better serve their shareholders, customers, and employees by pursuing organic growth strategies. In the vast majority of cases, M&A reduce shareholder value and only provide benefits for shareholders of target firms and the professionals who advise on, and broker the various deals. On the other hand, the few executive teams that are able to make acquisitions strategies work are able to provide higher returns than the market average.