2014 is on track to be the biggest year for global mergers and acquisitions in a decade. The corporate world is in the midst of a grand shopping spree. Over $2 trillion of corporate mergers and acquisitions have already been announced so far this year; 44% higher than in the same period last year.By June, there had been $786 billion worth of mergers and acquisitions in the United States, not far off from the total for all of 2007, the last “big spender” year. The rush to buy is coming from the massive stock piles of cash many businesses built up during the recession, and there’s little sign the pace will drop any time soon.

High-profile deals, like Facebook’s $19 billion purchase of messaging company WhatsApp, have helped put mergers and acquisitions in the news. Some recent M&A activity has been spurred by a new class of so-called tax-inversion deals conducted to allow companies in one country to benefit from lower taxes in another. For example, in August 2014, Burger King merged with the Canadian multinational fast-casual restaurant chain, Tim Hortons to create the world’s third largest quick service restaurant company. With a combined system sales of $23 billion, the new company now has over 18,000 restaurants in around 100 countries. Burger King will own majority shares (51%) of the new company. Critics claim the underlying reason for the merger is a tax inversion, allowing Burger King to pay lower Canadian tax. The US Treasury Department is said to be exploring ways to block future inversion deals.

However, there have been some abortive deals. Billionaire Rupert Murdoch’s 21st Century Fox recently withdrew its $80 billion takeover offer for Time Warner after failing to draw Time Warner to the negotiating table and Sprint and Softbank, faced with regulatory problems resulting from shrinking the number of big mobile operators from four to three, gave up in their attempt to purchase T-Mobile in a deal that The Wall Street Journal said would have valued T-Mobile at $32 billion. Typically 10 – 20% of proposed deals end in tears, and this year has been no exception.

By tradition, when deals flop, everyone pretends nothing has really changed. Rupert Murdoch declared that “21st Century Fox’s future has never been brighter” after failing in its acquisition of Time Warner. However, a failed giant deal usually damages the credibility of the both firms and the coherence of their strategy. For example, Time Warner’s shares fell by 13% the day after Rupert Murdoch’s exit and Sprint said it would remove its chief executive, Daniel Hesse following it failed purchase of T-Mobile.

The recent rash of failed deals may encourage other firms to be more cautious. The takeover announced on August 6th of Alliance Boots, a British pharmacy chain, by Walgreens, an American counterpart, was a downbeat affair. Walgreens lowered its earnings forecast; and in response to growing American disquiet about firms using takeovers to shift their tax bases abroad, also dropped a plan to use the deal to move its headquarters to Europe.

Advantages of mergers and acquisitions

Mergers and acquisitions are expected to achieve synergistic benefits resulting from:

  • more proficient management
  • economies of scale
  • more profitable use of assets
  • utilisation of market power
  • the use of complementary resources

Failure of merger and acquisitions

Pre-acquisition issues

However, mergers and acquisitions often fail at the implementation stage and negotiation stage, because of cultural difference between two firm and the proposed management composition of the combined business.

M&A also is sensitive to global economic gyrations and geopolitical tumult—and certainly there has been plenty of both going around that could potentially reverse M&A’s momentum in a hurry.

Post-acquisition blues

M&A may also fail to provide the additional value expected by the acquiring firm for a variety of reasons and may result in the later collapse of the alliance. These include:

1.      Lack of post-merger effort: If the acquiring firm hopes to free-ride on the efforts of target without paying due respect to the needs of the acquired business.

2.      Size of the firms: The size of the acquiring and acquired firms is an important factor for failure of M&As. ‘Acquisition indigestion’ may take place when a small firm buy outs a big firm or a giant firm acquires a small firms, but does not pay adequate attention its future development.

3.      Overstated information: During the M&A process, firms are prone to exaggerate its potential and qualities.

4.      Diversification: Research studies show that acquisitions of related industries perform better than acquisitions into unrelated markets. Diversification has been linked to lower financial performance and capital productivity and a higher degree of volatility in performance.

5.      Poor organisational fit: Often the acquiring and acquired firms have different administrative and cultural practices and personnel traits, which negatively affect organisational efficiency and reduce synergistic advantages.

6.      No common vision: A common vision can support planning and promote motivation. Without a collective vision, merged firms become unfocused and may fail to generate expected economies of scale.

7.      Consumer loyalty: The consumers of the acquiring and acquired firms may become confused by the nature of the new business and its offer. This may result in them switching allegiance to a new company.

8.      Failure to take responsibility: The management of the acquiring and acquired firms expect their counterparts to take responsibility for certain actions, which does not happen.

9.      Lack of courage: There are new shareholders associated with the merged businesses and the new firm needs to make courageous decisions to ensure the success of the combined venture, even if these are not popular with all of these new shareholders. If the management delay making required, but controversial, decisions the business may suffer.

10.  Ignorance: Ignorance indicates the unwillingness to share commercially sensitive information by the parties to an M&A.

11.  Paying Too Much: In a competitive bidding condition, a firm may be inclined to pay more than the real value of the acquired business.


IB-style questions

1. Distinguish between a ‘merger’ and a ‘takeover’.

2. Explain the concept of synergies following an M&A.

3. Analyse the reasons for potential failure of M&A.

4. Investigate one of the M&A examples in the post in more detail and then evaluate external growth as a method of business expansion.