July 22, 2013

Why acquisitions fail to create value and what can be done about it?

Or The Art of Mergers and Acquisitions

Yvan Allaire and Mihaela Firsirotu | IGOPP

That so many mergers and acquisitions have failed to deliver value for the shareholders of the acquiring firm (or merged firms) has become a dominant theme, the conventional wisdom of the post 2000 era. That is, of course, until the next wave of acquisitions washes in with its “implacable” logic and seductive rationale.

The evidence of failure at the game of M&A is harsh and overwhelming, or so it seems:

  • Two thirds of all transactions completed during the 1980’s ended up destroying value for the acquirer(Sirower,1997);
  • Of 150 deals of over US 500M in the 1990’s, half eroded the returns of the acquirer and only 17% increased returns substantially (Accenture, 2001);
  • From a study of 700 cross-border deals between 1996 and 1998, KPMG concludes that 53% destroyed value; furthermore, they found that cross-border deals involving a U.K. and a U.S. company were 32% more likely to succeed while deals involving U.S. and continental European firms were 11% less likely to succeed.
  • Based on a survey of 118 companies worldwide conducted in early 2001, KPMG estimates that 30% of M&A transactions these companies engaged in have created value, 39% produced no discernible difference and 31% actually destroyed value; they further observe that 24% of companies in Europe and 35% of companies in the US created value. A similar survey conducted two years earlier had found that only 17% of transactions had created value […]

Here is a question to the reader. Why did companies keep on acquiring other companies at an unprecedented rate throughout the 1990s and early 2000s despite this overwhelming evidence?

What can explain this behavior on the part of highly paid, presumably sagacious, expensively advised CEOs? In our experience and based on abundant empirical evidence, the answer to that question is multiple. […] Read more