The M&A Failure Trap: Why Most Mergers and Acquisitions Fail and How the Few Succeed
Baruch Lev and Fen Gu
Wiley (November 2024)
How can companies get much better at mergers and acquisitions? So far, most haven’t. Why is that?
You may suspect that many (if not most) mergers and acquisitions either fail or fall far short of expectations. According to Baruch Lev and Fen Gu, “research shows that an astounding 70-75% of all acquisitions fail to live up to expectations, at shareholders’ expense, oƒ course… The valuation guru Aswath Damodaran (New York University) concurs: ‘If you look at the collective evidence across acquisitions, this is the most value-destructive action a company can take.’ Harvard’s late Clayton Christensen, of the ‘disruptive innovation’ fame, reported that studies have documented an unbelievable failure rate of 70-80%, while KPMG, a leading accounting firm, estimated more precisely the M&A failure rate at 83%.”
What do Lev and Gu think? Executives’ acquisition decisions “are in fact [begin italics] getting worse [end italics].” In The M&A Failure Trap, they share the lessons to be learned from more than 40,000 deals conducted over 40 years, “along with a comprehensive [begin italics] merger success measure [end italics] that we developed, reflecting both the financial (sales and gross margin growth) and market (stock returns) dimensions of acquisition success. We found that the M&A success rate over the past 40 years was roughly one out of three, falling recently to one out of four, largely in line with previous research.”
Briefly, these are among the subjects and related issues on which Lev and Gu focus:
o What explains the very high and increasing acquisition failure rate
o How to enhance the likelihood of an acquisition success
o A “Predictive Merger Scorecard”
o Lessons to be learned from three M&As: Google/YouTube, Teva/Activis, and Hewlett-Packard/Autonomy
o The ever-changing nature of M&As: Deal Characteristics
o The ever-changing nature of M&As: Markets and merger sizes
o Internal dxevekopment: Alter ative to M&A
o “The Folly of the Conglomerate Acquisitions”
o The “best of times, the worst of times” for “M&As
o Integration: The “Achilles Heel” of the M&A process
o Accounting matters that really matter
o “Killler” acquisitions
o Holding onto “losers”
o Means of acquisition payment: (cash, stocks, or combination?
o How to spring the “M&A Failure Trap”
Who will derive the greatest value from the information, insights, and counsel that Baruch Lev and Fen Gu provide? There are three primary groups: Senior-level executives in organizations that are involved in an M&A process, executives in firms that have been retained to assist that process, and any others who are currently preparing for a business career or have only recently embarked upon one.
I urge all of them to keep these concluding thoughts clearly in mind: If the proposed acquisition under consideration shares one or more of the risk factors cited (see Pages 180-181), its likelihood of success is slim. “Such proposed acquisitions required a thorough failure risk analysis at the board level, perhaps with the assistance of outside experts, to make sure that this specific acquisition is needed, that the merger candidate is the right one, that the expected benefits were objectively and reliably estimated based on various economic scenarios, and that the buyer’s staff is fully capable of successfully and expeditiously integrating the merging units. Acquisitions sharing these risk characteristics require close ‘adult supervision.’”
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Here are two other suggestions while you are reading The M&A Failure Trap: First, highlight key passages. Also, perhaps in a notebook kept near-at-hand (e.g. Apica Premium C.D. Notebook A5), record your comments, questions, and action steps (preferably with deadlines). Pay special attention to each set of “Takeaways” provided at the conclusion of Chapters 2-15. Also, note that some of the most valuable material is provided in the “Epilogue” and “Appendix.”
These two simple tactics — highlighting and documenting