Countless studies have been done over the years to attempt to measure the rate of success of mergers and acquisitions. One of the most quoted sources is a KPMG study conducted in 1999 of 107 mergers and acquisitions between 1996 and 1998, which showed that only 17 percent of these deals increased the shareholder value, 30 percent were unchanged, and 53 percent decreased the value of the firm to shareholders (KPMG, 1999). The values of the megers were determined by measuring the share price of each company at the time of the deal and again one year after. A similar study conducted by consulting firm Mckinsey of mergers, also conducted in the 1990’s, demonstrated that less than a quarter of the mergers generated excess returns on investment (Surowiecki, 2008). Another earlier study measured large acquisitions completed between 1971 and 1982. This earlier study even demonstrated that by 1989, 44% of these acquisitions had already been divested, with the median length of time between the acquisition and divesture only being seven years. By large, diversifying acquisitions were four times more likely to be divested than related acquisitions. Of these divestures, 42 percent of companies reported a gain on the sale of the target company, 44 percent reported a loss, and 14 percent broke even. The top reason why company CEOs and business reports cited for the subsequent divestures were a change in focus or corporate strategy (Kaplan and Weisbach, 1992).
With such poor overall performance, it is questionable why companies continue to merge at such a rapid rate. There are some notable reasons and trends. For example, mergers have been shown to be more successful when the two merging companies were similar, when the merger helped create a market leadership, when the deal was stock-only, and when it created strong cost savings (Allred, et als., 2005). For instance, the merger of J.P. Morgan and Bank One lead to three billion dollars in annual cost savings (Surowiecki, 2008) While companies often point to economic inefficiencies in explaining the large amount of failures, it has been demonstrated that the greater the difference between the acquiring and target firm that existed, the greater the likelihood the deal would fail. Even though unrelated firms seeking to diversify have had higher failure rates, companies who have become large conglomerates, such as GE, are the exception to the rule as they have become skilled at acquiring and merging with unrelated firms.
Another major cause of why companies continue to merge and acquire each other when the possibility of success is so slim is due to the nature of the “golden parachutes” provided to the CEOs and top executives of the target firm, providing them with a larger incentive to make a deal then consider the future of the firm. This coupled with the feeling among CEOs that a company must “grow or die” pressures CEOs of failing corporations to quickly sell the company rather than preside over a failing firm, leads to acquisitions and mergers occurring with little concern of the firms future.
Conclusion
Overall, various studies and quantitative analysis has demonstrated that acquisitions create economic value, particularly for cash financed deals. The greatest motivations for acquisitions remain to be cost cutting rather than value creation or market power. Similarly mergers have been shown to generally create economic value through efficiency gains.References
Allred, B. B., Boal, K. B., & Holstein, W. K. (2005). Corporations as stepfamilies: A new metaphor for explaining the fate of merged and acquired companies. Academy of Management Executives, 19(3), 23-37
Kaplan, S. N. (2006, January 19). Mergers and Acquisitions: A Financial Economics Perspective. University of North Texas Libraries. Retrieved September 22, 2010, from govinfo.library.unt.edu/amc/commission_hearings/pdf/kaplan_statement.pdf
Kaplan, S. N., & Weisbach, M. S. (1992). The Success of Acquisitions: Evidence from Divestitures. The Journal of Finance, XLVII(1), 107-114.
KPMG. 1999. Unlocking Shareholder Value: The Keys to Success, Mergers and Acquisitions, A Global Report, KPMG, London.
Surowiecki, J. (2008, June 9). All Together Now? : The New Yorker. The New Yorker. Retrieved September 20, 2010, from http://www.newyorker.com/talk/financial/2008/06/09/080609ta_talk_surowiecki
