McKinsey researchers surveyed 19 of the busiest and largest acquirers to find out why some acquisititions succeed (positive stock price reactions to the announcement) and some fail (negative stock price reaction). They find that executives at firms pursuuing succesful acquisitions mentioned fewer reasons for the merger than those at unsuccesful acquisitions.
I found something similar in my experience as a government antitrust enforcer:
In some mergers the value created is obvious and well documented, but for a surprising number the analysis is nothing more than a litany of excuses copied out of a corporate strategy textbook to justify the deal to the board of directors.
For a large percentage of proposed mergers, the internal analysis of the merger by the acquiring firm was surprisingly bad:
... mergers are thought to cure a variety of corporate ailments, including, but not limited to: underdiversification, high taxes, excessive overhead, limited product offerings, under-investment in R&D, and my personal favorite, ruinous competition. All that is missing is the disclaimer that the FTC requires on testimonial ads: "results may differ.”
Apparently, however, things have gotten better. Another McKinsey survey finds that in 2006, the merger premium for the acquired firms dropped from 30% to 20% and that stock price reactions were more likely to be positive following the merger announcement.
What about the qualitative reasons mergers and acqs survive or fail?
ReplyDelete"By some estimates, 85 percent of failed acquisitions are attributable to mismanagement of cultural issues." —INDUSTRIAL MANAGEMENT
The "feelings" analysts often get about stock price forecasts can be attributed here...
The hard part about what we call "post mortems," (going back to look at mergers to see what happened) is figuring out what the counterfactual is--what would have happened had their been no merger. For example, you can see a failed merger, but suppose that the merger delayed failure by reducing losses. We would still call that merger a success.
ReplyDeleteThe advantage of looking at stock market reactions is that you get an immediate reaction that can be measured against current expectations. If the stock price of the acquiring firm decreases, you know that those betting on the stock think that the acquiring firm is getting something worth less than what they paid.
It could be, as you point out, that the reason it is worth less is that current management cannot handle the cultural issues.
"They find that executives at firms pursuuing succesful acquisitions mentioned fewer reasons for the merger than those at unsuccesful acquisitions."
ReplyDeleteGranted, I'm feeling too lazy to dig through their methodology right now, but I do wonder whether these questions were asked before or after the merger was known to be (un)successful.
If after, those who presided over value creation might not feel the need to cite a lot of reasons they were right, whereas the others might feel the need to have a laundry list of why they should have been right (a list the compensation committee, no doubt, would just have to see the brilliance of)