Why the M&A game can destroy company value

It's a long-standing question: do mergers and acquisitions (M&A) really benefit the buyer? M&A enthusiasts waffle on about how the threat of a takeover rouses lethargic executives to greater heights of efficiency. Empire-building CEOs wax loud and long about the synergies their deals will generate. But the evidence is rather different.

In reality, M&As turn out to be a disaster, says Graham Bowley in the FT. He cites Mark Sirower, author of The Synergy Trap: How Companies Lose The Acquisition Game, who claims that two-thirds of deals end up destroying company value. This is backed up by a McKinsey study of 100 mergers in the UK and US in the 1990s, which found that only one quarter ever recovered the costs of the merger.

The reasons for these grim results are fairly straightforward. First, bidders pay too much. The acquisition process is becoming increasingly competitive and sellers more sophisticated, says John Kelly of KPMG, quoted in the FT. The successful buyer is often forced to pay a premium to beat the competition. Then there is good, old-fashioned ignorance, where the successful bidder imagines cost-savings that don't exist. Next is a failure to plan. Eight out of ten buyers don't adequately plan for how the new firm will be integrated after the deal, claims Sirower. And when there is a plan, there are often problems integrating the two firms, such as the clash of cultures and departures of key staff. Finally, there's the market itself. Mergers are rarely completed quickly and in that time the market can change. Competitors adapt and the expected gains vanish.

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All this is not to say that takeovers are always bad news. Surveys suggest that a takeover is more likely to pay off when the deals are small, are paid for in cash rather than stocks, and when the companies are in the same, or similar, industries. "For companies that know what they are doing, it makes a lot of sense," says Sirower. "But for those that do not, it is a disaster."