The Economics, July 22nd, 2000

A stream of studies has shown that corporate mergers have even higher failure rates than the liaisons of Hollywood stars. One report by KPMG, a consultancy, concluded that over half of them had destroyed shareholder value, and a further third had made no discernible difference. Yet over the past two years, companies around the globe have jumped into bed with each other on an unprecedented scale. In 1999 the worldwide value of mergers and acquisitions rose by over a third to more than $3.4 trillion. In Europe, the hottest merger zone of all, the value of deals more than doubled, to $1.2 trillion.

Few failures are on the scale of AT$T's 1991 purchase of NCR, the second-largest acquisition in the computer industry, which was reversed after years of immense loses. But none has gone entirely smoothly either; and all offer useful insights.

Most of the mergers are defensive, meaning that they were initiated in part because the companies involved were under threat. Sometimes, the threat was a change in the size or nature of a particular market: McDonnell Douglas merged with Boeing, for example, because its biggest customer, the Pentagon, was cutting spending by half. Occasionally the threat lay in globalization and its demand for greater scale: Chrysler merged with Daimler-Benz because, even as number three in the world's largest car market, it was too small to prosper alone.

When a company merges to escape a threat, it often imports its problems into the marriage. Its new mate may find it easier to see the opportunities than the challenges.

As important as the need for clear vision and due diligence before a merger is a clear strategy after it. As every employee knows, mergers tend to mean job losses. No sooner is the announcement out than the most marketable and valuable members of staff send out their resumes. Unless they learn quickly that the deal will give them opportunities they will be gone, often taking a big chunk of shareholder value with them.

The mergers that worked relatively well were those where managers both had a sensible strategy and set about implementing it immediately. The Daimler Chrysler merger integration was pursued with great thoroughness-although not skillfully enough to avoid the loss of several key people. After Citibank merged with Travelers to form Citigroup, the world's biggest financial-services firm, it quickly reaped big profits from cost-cutting rather than cross-selling different financial services to customers.

Luck and the economic background play a big part. Merging in an upswing is easier to do, as rising share prices allow bidders to finance deals with their own money, and it is also easier to reap rewards when economies are growing. But companies, like people, can make their own luck: Boeing's Phantom Works, an in-house think-tank that speeded up their integration process developed new products and refocused the company on its diverse customers, was a serendipitous creation in the turmoil that followed its deal with McDonnell Douglas.

Above all, personal chemistry matters every bit as much in mergers as it does in marriage. It matters most at the top. No company can have two bosses for long. So one boss must accept a less important role with good grace. It helps if a boss has a financial interest in making the merger work. Without leadership from the top, a company that is being bought can all too often feel like a defeated army in an occupied land, and will wage guerrilla warfare against a deal.

The fact that mergers so often fail is not, of itself, a reason for companies to avoid them altogether. But it does mean that merging is never going to be a simple solution to a company's problems. And it also suggests that it would be a good idea, before they book their weddings, if executives boned up on the experiences of those who have gone before them. 

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