Mergers & Acquisitions

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Week 4
Top Mergers and Acquisitions Failures of All Time
• There are many reasons why a company would want to acquire another
entity. But one thing is for sure, the acquirer aims to create value that
will not be possible as a standalone business, also known as synergies.
• However, not all deals realize their projected synergies.
• Throughout history, there have been a handful of mergers and
acquisitions that have been flat-out disasters.
Top Mergers and Acquisitions Failures of All Time
• America Online and Time Warner ($165 Billion)
• America Online Inc. announced its plans to buy Time Warner Inc. for
$165 billion in shares and debt on January 10, 2000. AOL stockholders
owned 55 percent of the new business, while Time Warner shareholders
owned 45 percent, according to the transaction conditions.
• The strategy was sound, and it had the potential to be transformative.
Time Warner would suddenly have a new customer base of tens of
millions. Conversely, access to Time Warner's cable network would
benefit AOL.
Top Mergers and Acquisitions Failures of All Time
• This mega-deal took place during the dot-com boom.
• The dot-com bubble burst shortly after the deal closed, causing the
company's AOL segment to lose a large amount of value.
• Advertising dollars vanished, and the corporation recorded a staggering
loss of $99 billion dollars in less than two years.
• This transaction is considered one of the worst mergers of all time.
Top Mergers and Acquisitions Failures of All Time
• Apart from the catastrophe, the two companies had significant cultural
challenges that due diligence failed to reveal. According to Steve Case,
AOL's co-founder, the purpose was to seize the potential of technological
convergence.
• However, some in the combined firm were not excited about the
corporation's digital strategy.
• AOL and Time Warner separated into two firms less than a decade after
the deal closed.
Top Mergers and Acquisitions Failures of All Time
• Citicorp and Travelers Group ($83 Billion)
• Citicorp and Travelers Group announced plans to merge on April 7, 1998,
for $83 billion to establish the world's largest financial services firm,
including banking, insurance, and investment activities.
• Citigroup was the proposed name for the new corporation, and was
supposed to have 100 million consumers in 100 countries and 160,000
employees selling a wide range of financial products and services.
Top Mergers and Acquisitions Failures of All Time
• Travelers gained the capacity to promote mutual funds and insurance to
Citicorp's retail clients as part of the merger.
• In contrast, Citicorp gained access to Travelers' more extensive client
base of investors and insurance buyers.
• This deal was expected to pressure other financial firms to merge and
test if consumers wanted a financial supermarket.
Top Mergers and Acquisitions Failures of All Time
• Cultural integration issues arose as a result of the merger.
• Citi's most significant issues were inflated costs, outdated technology,
and employee retention following the merger.
• Citicorp had a cumulative return of 35.4% during the 279 days merger
period. Travelers Group had a cumulative return of 41.49% in the 279
days leading up to the merger, from 10 days to 268+ days.
• Citigroup broke off Travelers Property and Casualty into a subsidiary firm
in 2002 because the predicted benefits failed to materialize. MetLife
purchased Travelers Life and Annuity from Citigroup in 2005.
Top Mergers and Acquisitions Failures of All Time
• Microsoft and Nokia ($7 Billion)
• In April 2014, Microsoft completed its acquisition of Nokia's mobile
phone division for $7.2 billion.
• The two companies first formed a strategic partnership in 2011 that
resulted in all Nokia smartphones running on the Windows Phone
operating system.
• Despite Nokia having made impressive Windows phones, it was not
enough to be profitable.
Top Mergers and Acquisitions Failures of All Time
• A year before the acquisition, Nokia was considering a move to Android
and would, in theory, leave Windows with no OEM support. After all, it
controlled more than 90 percent of the Windows Phone market.
• Also, Steve Ballmer, the CEO at that time, was looking for a way to enter
the mobile phone industry to better compete with Apple and Google.
Many have speculated that this was the main driver of the deal and was
Microsoft's way of solidifying its ground in the mobile industry.
Top Mergers and Acquisitions Failures of All Time
• However, acquiring Nokia didn't change the harsh reality that Windows
phones have only a 3% market share. Very few people loved the phones,
and Android phones held a 79% market share. A couple of years after this
deal, Microsoft wrote off $7.6 billion and had to lay off approximately
25,000 employees.
• In 2016, Microsoft sold Nokia to HMD, for $350 Million.
 Why Mergers Fail?
• Some Common Questions about M&A
• What exactly does merger failure mean?
• So why do mergers go wrong?
• Why are mergers allowed to fail?
• How widespread is merger failure?
• What is the most common problem?
• Is merger failure more pronounced in any sector or industry?
• What are merger failure drivers?
 Some Common Misconceptions
• The merger creates greater market power through increased market share
• Merged companies become stronger than they were individually.
• The merger creates scale economies by combining the skills of each
company.
• The merger creates shareholder value.
• The merger stimulates innovation.
• Once two companies have merged, that’s it.
• Companies are acquired only by other companies.
• Acquisitions are always hostile.
 Merger Failure Drivers
• Shareholder Rejection
• Negotiation Failure
• Regulator Block
• Strategic Failure
• Lack of Valid Strategic Rationale and Focus
• Lack of Valid Implementation and Integration Strategies
• Multiple Acquisition and Lack of Control
• Hostility
 Merger Failure Drivers (Continued)…
• Cultural Failure
• Ineffective Cultural Integration
• Ineffective Communication
• Ineffective Human Resources Control
• Financial Failure
• Inaccurate Target Evaluation and Excess Premium
• Unrealistic Synergy Realization
• Lack of Financial Slack and Poor Debt Position
 Merger Failure Drivers (Continued)…
• Integrative Failure
• Management Team Selection and Project Management
• Change Experience and Flexibility
• Information Technology Failure
• The IT Issue
• Staff
• Hardware
• Software
• Operational System
• IT Evaluation Process
• Due Diligence
 Merger Failure Drivers (Continued)…
• Leadership Failure
• Inappropriate Leadership Style
• Managers needs to be
• Directive
• Supportive
• Participative
• Reward
 Merger Failure Drivers (Continued)…
• Leadership Failure
• Managers should posses
• Decision making skills
• Problem solving skills
• The ability to integrate new team members.
• Interpersonal skills.
• The ability to detect and resolve conflict
• Communication skills
• Interface management skills
• Factor-balancing skills.
 Merger Failure Drivers (Continued)…
• Risk Management Failure
• Ineffective Risk Identification and Analysis
• Ineffective Risk Management, Monitoring and Control
Ineffective Risk Management, Monitoring and Control
• Pre-deal stage
• Analyze the product and service compatibility of each organization in
order to achieve the best possible strategic fit.
• Evaluate the impact of the proposed deal on all stakeholders,
including shareholders, employees, customers, suppliers and the
community.
• Identify and detail any potential weak areas or vulnerabilities in
relation to customers and potential loss of customers.
Ineffective Risk Management, Monitoring and Control
(Continued)…
• Pre-deal stage
• Identify any areas that may cause costs to increase, such as the
integration of complex IT systems.
• Carry out any necessary modelling calculations to test the proposed
economic viability and the returns that can reasonably be expected.
• Apply characteristics mapping to understand the degree and extent of
changes required to be made.
Ineffective Risk Management, Monitoring and Control
(Continued)…
• Due diligence stage
• Carry out detailed analysis of all stakeholder issues including the
impact that the different cultures, operating philosophies, social
responsibility and corporate governance of the two organizations will
have on stakeholder interests.
• Consider customer base overlaps and making best use of marketing
and sales.
Ineffective Risk Management, Monitoring and Control
(Continued)…
• Due diligence stage
• Consider potential synergies from a risk management perspective.
• Determine the likely offensive actions of competitors.
• Calculate detailed financial projections based on the floor value and
values of synergies created by the acquisition.
• Ensure continued customer satisfaction with the product and/or
service.
Ineffective Risk Management, Monitoring and Control
(Continued)…
• Due diligence stage
• Ensure that suppliers remain committed to the acquirer rather than seeking work
elsewhere.
• Ensure that clear and effective communications are maintained throughout the
organization at all levels, particularly in relation to employment security and
possible job losses.
• Ensure that shareholders remain committed to the acquirer.
• Ensure that the implementation plan is executed quickly and effectively, and that
all associated monitoring and control functions are carried out.
• Monitor employee migration, especially that of key people, in order to ensure
that talent erosion is minimized.
The Globalization Issue
• The Implications of Globalization
• Issues with International Mergers
The Development of a Process Model
• Having considered in some detail why mergers fail, it is appropriate to
attempt to develop a process model to represent the merger or
acquisition process
• A process model is simply a representation of the processes and sub-
processes involved in carrying out any given operation.
• The model acts as a kind of simple map to show the main stages involved
in moving from one condition to another.
• The process model can be used as a guide in that it shows the main
actions, and also the sequence of actions, required to achieve an
acceptable outcome.
The Development of a Process Model (Continued)…
• There are clearly three separate areas of mergers or acquisitions where
different types of problems can occur. The three primary stages or phases
are:
• the strategic logic phase;
• the valuation phase;
• the implementation phase.
• The merger integration team, or whoever is in charge of planning and
implementing the merger, faces different challenges during each phase.
• The phases are also interlinked and are to some extent interdependent, in
that a failing in one phase may well negate successes elsewhere in other
phases.
Phase 1. Strategic logic
• . In strategic mergers and acquisitions the primary strategic objective is
to increase competitive advantage and therefore increase shareholder
value. The proposed merger or acquisition must contribute to these
objectives or the underlying rationale is suspect.
• A proposed speculative acquisition, such as buying a spin-off in the hope
of selling it on at a profit, would not necessarily fulfil the strategic
objectives of increasing competitive advantage and increasing
shareholder value.
Phase 1. Strategic logic
Phase 2. Valuation
• Valuation is essential in order to ensure that the acquirer can afford to go
ahead with the merger or acquisition.
• There is no point in proceeding with a proposed merger, even if the
strategic logic is excellent, if the purchase price is too high.
• The valuation sub-phase uses normal costing and valuation approaches
in order to arrive at a representative valuation of the target.
• The due diligence sub-phase, is concerned with the accuracy of the
valuation. The due diligence process is necessary in order to ensure that
all actual and potential costs associated with the target are included or
allowed for in the valuation.
Phase 2. Valuation
Phase 3. Implementation
• Implementation involves taking the strategic vision and financial
appraisal of the two earlier phases and actually converting these into a
real outcome where the long-term strategic objectives of the merger or
acquisition can be realised.
• Unlike the two earlier phases, the implementation phase is about ‘doing
it’ rather than ‘evaluating it’. As a result a completely different skills set is
required.
• It could be argued that phase 1 is the realm of the strategic planner
whereas phase 2 is the realm of the financial analyst. Phase 3 is certainly
the realm of the project manager.
Phase 3. Implementation
Summary (What causes failed mergers and acquisitions?)
• Value destruction
• About 60% of mergers end up destroying shareholder value for at
least one company. Business leaders dive into deals with lofty
visions of what they might be able to accomplish, but the results
rarely live up to expectations.
• Cultural issues
• When two companies merge, both often have different ideas about
what they new company will do. This usually leads to
disagreements, conflict, and ultimately, failure. Each organization
will have its own culture, values, and operations.
Summary (What causes failed mergers and acquisitions?)
• Value destruction
• About 60% of mergers end up destroying shareholder value for at
least one company. Business leaders dive into deals with lofty
visions of what they might be able to accomplish, but the results
rarely live up to expectations.
• Cultural issues
• When two companies merge, both often have different ideas about
what they new company will do. This usually leads to
disagreements, conflict, and ultimately, failure. Each organization
will have its own culture, values, and operations.
 Summary (What causes failed mergers and acquisitions?)
Continued…
• Lack of Communication
• They say lack of communication is one of the biggest reasons
marriages fall apart. The same is true for mergers and acquisitions.
Managers in both companies need to be able to communicate
properly, and share guidelines and processes with their team.
• Overpaying
• There are examples of organizations spending billions on an
acquisition or merger. Unfortunately, the more companies pay for
an M&A deal, the more chance they have of never recouping their
lost cash.
 Summary (What causes failed mergers and acquisitions?)
Continued…
• Poor integration
• When companies merge, it’s important to integrate their operations
quickly and effectively to minimize disruptions. Unfortunately, a lot
of companies don’t take the time to properly plan for the
integration process.
• Misunderstandings
• One of the most common reasons mergers and acquisitions fail is
because one company didn’t really understand what they were
getting from the other. This leads to confusion when the time comes
to synergize the two brands and create something new.
 Summary (What causes failed mergers and acquisitions?)
Continued…
• External factors
• Sometimes failed mergers and acquisitions are a result of external
factors. The Countrywide/Bank of America deal failed because the
financial sector collapsed, making it impossible for the business to
grow – no matter how well they integrated.
• Limited owner involvement
• Appointing advisors is usually a must for any high-stakes M&A deal.
However, leaving everything to them is an easy way to doom
yourself to failure. Owners from both companies need to be
involved from the start, driving the structure of the deal themselves.
 Summary (What causes failed mergers and acquisitions?)
Continued…
• Hidden financial problems
• Some companies will pretend everything is fine financially, but when
a merger or acquisition finishes, various debts and problems come
to light.
• High recovery costs
• Mergers and acquisitions are often time-consuming and expensive.
One of the main reasons they fail is high recovery costs. Some
companies need to invest in new systems and processes.
Occasionally, there are also redundancies within the new company,
which leads to even more expense.
Characteristics of a Successful Merger
• The merger or acquisition reinforces the strategic focus of the
acquirer
• The acquirer and the target work in related areas
• The acquirer should ideally have previous merger or acquisition
experience
• The target should be innovative and should ideally possess some
kind of unique skill
• Both acquirer and the target should have change management
experience
Characteristics of a Successful Merger (Continued)…
• Low debt position
• Acquisitions should be by mutual agreement
• The target should be thoroughly researched
• The acquirer should ideally have plenty of cash
• The acquirer should establish proper implementation systems
• Employee acceptability
• Communication
Rules for Avoiding an Unsuccessful Merger
• Rule 1. Stay focused
• Rule 2. Stay tuned
• Rule 3. Be careful if it’s the first time.
• Rule 4. Go for targets that ‘chill’.
• Rule 5. Look for innovative targets that have unique skills.
• Rule 6. Don’t break the bank.
• Rule 7. Smile, don’t snarl.
• Rule 8. Check them out before you agree to a date
Rules for Avoiding an Unsuccessful Merger
• Rule 9. Remember this is all going to be expensive
• Rule 10. Plan everything carefully and try to see what could go
wrong.
• Rule 11. Sell it to the people
• Rule 12. Spread the word.