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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Wiley Finance
- Sprache: Englisch
An essential read about M&A for executives and investors who make critical decisions when M&A events and opportunities happen.
In The M&A Failure Trap: Why Most Mergers and Acquisitions Fail and How the Few Succeed, a distinguished team of finance and accounting researchers and practitioners delivers a practical and up-to-date exploration of the shortcomings of managerial mergers and acquisitions decisions. In the book, you'll discover:
- Why 70-75% of all corporate acquisitions fail
- How to substantially improve acquisition decisions
- How to predict a specific merger outcome
All the lessons and advice provided in this book are fact-based—derived from a sample of 40,000 real-life merger cases around the world which are thoroughly analyzed and provide the foundations for our findings and recommendations.
The authors offer keen insights into the most important predictors of mergers and acquisitions failure and success and show you how to identify the potential warning signs of a problematic transaction. The book also provides insights into the human element of M&As: what happens to executives and employees of failed acquisitions. You will also find in the book a comprehensive review of the state-of-the-art research on M&As and numerous analyses of successful and unsuccessful real-life mergers.
Perfect for executives and directors contemplating a major M&A decision or currently engaged in such a transaction, The M&A Failure Trap will also earn a place in the libraries of students of business and economics, as well as investors faced with decisions impacted by a merger or acquisition, and shareholders expected to vote on an upcoming transaction.
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Seitenzahl: 394
Veröffentlichungsjahr: 2024
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Table of Contents
Cover
Table of Contents
Title Page
Copyright
Preface
Preamble: Why Should You Read This Book?notesSet
P.1 THE M&A FAILURE TRAP
P.2 M&A DECISIONS ARE GETTING WORSE
P.3 THE CENTRAL ISSUES EXPLORED IN THIS BOOK
P.4 FINALLY, WHO SHOULD READ THIS BOOK?
Notes
CHAPTER 1: Appetizer The Good, the Bad, and the Ugly
1.1 THE GOOD: GOOGLE SNAPS YouTube AND ENTERS THE VIDEO-SHARING SPACE
1.2 THE BAD: TEVA BUYS ACTAVIS AND LOSES ITS FOOTING
1.3 THE UGLY: Hewlett-Packard PICKS UP AUTONOMY AND ALMOST LOSES ITS OWN
1.4 PRELIMINARY LESSONS
1.5 FINALLY, A WORD OF CAUTION
Notes
CHAPTER 2: The Ever-Changing Nature of M&As (1) Deal Characteristics
2.1 CONGLOMERATES RISE FROM THE ASHES
2.2 BUYERS ARE BECOMING DESPERATE
2.3 INTERNAL DEVELOPMENT BECOMES A LESS ATTRACTIVE SUBSTITUTE FOR ACQUISITIONS
2.4 THE ACQUISITION PREMIUM – UP, UP, AND AWAY
2.5 THE USE OF DEBT IN ACQUISITIONS DECREASES
Note
CHAPTER 3: The Ever-Changing Nature of M&As (2) Markets and Merger Sizes
3.1 THE GROWING VOLUME OF M&A DEALS
3.2 TECHNOLOGY IS FLOURISHING IN ACQUISITIONS, TOO
3.3 M&A GOES GLOBAL
3.4 THE CLOSE RELATION BETWEEN M&A AND INVESTORS’ SENTIMENT
3.5 BUYERS AND TARGETS GET MODERATELY LARGER
3.6 RESOLVING THE M&A FAILURE CONUNDRUM: WHY THE HIGH AND INCREASING FAILURE RATE?
Notes
CHAPTER 4: Internal Development The Alternative to Acquisitions
4.1 REGENERATING GROWTH WITHOUT ACQUISITIONS
4.2 REFRESHING WEARY BUSINESS MODELS
4.3 SO, WHAT DOES IT ALL MEAN?
4.4 THE TRADE-OFFS
4.5 INTERNAL DEVELOPMENT AND ACQUISITIONS ARE SUBSTITUTES
4.6 THE MEASURED BENEFITS OF INTERNAL DEVELOPMENT VS. ACQUISITIONS
4.7 LESSONS FOR MANAGERS, DIRECTORS, AND INVESTORS
Notes
CHAPTER 5: The Folly of the Conglomerate Acquisitions
5.1 A CONGLOMERATE ACQUISITION: INTEL–MOBILEYE
5.2 THE ALLEGED BENEFITS OF CONGLOMERATES
5.3 AND THE FUNDAMENTAL SHORTCOMINGS OF THE CONGLOMERATES ARE…
5.4 BUT WAIT: WHAT ABOUT THE CLAIMED EFFICIENCIES?
5.5 SO, HOW SURPRISED WE WERE …
5.6 FINALLY, BEWARE THE SELFISH CEO
Notes
CHAPTER 6: Are There “Best Times” to Acquire Businesses (1)? External Opportunities
6.1 STAY AWAY FROM HOT CAPITAL MARKETS
6.2 DON’T SUCCUMB TO PEER PRESSURE TO ACQUIRE
6.3 DON’T BUY DURING ECONOMIC RECESSIONS
6.4 DON’T BUY WHEN YOUR STOCK IS OVERVALUED
6.5 SO, WHEN SHOULD YOU ACQUIRE A BUSINESS?
Notes
CHAPTER 7: Are There “Best Times” to Acquire Businesses (2)? Internal Opportunities
7.1 AVOID HIGH ACQUISITION PREMIA
7.2 SUCCESSFUL REORGANIZATIONS DON’T NECESSARILY CALL FOR ACQUISITIONS
7.3 ACQUISITIONS WORK BEST FOR SUCCESSFUL BUYERS
7.4 CEOs SHOULDN’T INITIATE THEIR TENURE BY BUYING COMPANIES
7.5 A BRIEF STATISTICAL NOTE (DON’T SKIP)
7.6 FINALLY, WHEN SHOULD YOU ACQUIRE A BUSINESS?
Notes
CHAPTER 8: Integration – The Achilles’ Heel of M&A
8.1 WHEN THE GOING GETS TOUGH, EVERYONE LEAVES
8.2 SPRINT–NEXTEL: A BUNGLED INTEGRATION
8.3 AN INTEGRATION RISK PROFILE
Notes
CHAPTER 9: Accounting Matters
9.1 THE ACCOUNTING FOR ACQUISITIONS
9.2 THE ACCOUNTING FOR INTANGIBLE ASSETS
9.3 HOW USEFUL ARE THE POST-ACQUISITION REPORTS TO INVESTORS?
9.4 GOODWILL
9.5 DETERMINING ORGANIC GROWTH
9.6 IN-PROCESS R&D
9.7 WHAT DOES ALL THIS MEAN?
Notes
CHAPTER 10: Killer Acquisitions
10.1 VISA IS OUT TO KILL PLAID
10.2 HOW FREQUENT ARE KILLER ACQUISITIONS?
10.3 IMPLICATIONS
Notes
CHAPTER 11: Holding onto Losers
11.1 FAILED ACQUISITIONS ARE KEPT FOR TOO LONG
11.2 DELAYED GOODWILL WRITE-OFF
11.3 POSTPONING THE INEVITABLE
11.4 WHY PROCRASTINATE WITH FAILED TARGETS?
11.5 AND NOW, TO OUR PROOF
11.6 HOW TO OVERCOME THE ADVERSE EFFECTS OF SUNK COSTS AND LOSS DISCLOSURE?
Notes
CHAPTER 12: Means of Acquisition Payment: Cash, Stocks, or Mix? Does It Matter?
12.1 VARIOUS INTERESTING TRENDS
12.2 BUT WHAT DETERMINES THE MEANS OF PAYMENT?
Notes
CHAPTER 13: But What If Executives Are Irrational or Self-centered?
13.1 HAVE YOU HEARD ABOUT “AGENCY COSTS”?
13.2 UNETHICAL BEHAVIOR: BUYING WITH INFLATED SHARES – A PACT WITH THE DEVIL
13.3 OVERCONFIDENT EXECUTIVES: TOO MUCH OF A GOOD THING
Notes
CHAPTER 14: The Human Element Acquisitions, Executives, and Employees
14.1 ACQUISITIONS’ EFFECTS ON CEO TENURE AND COMPENSATION
14.2 EMPLOYEES: TURNOVER AND EFFICIENCY
14.2.3 Acquisitions and Employee Efficiency
Notes
CHAPTER 15: Do It Yourself Predict an Acquisition’s Outcome
15.1 A SYNOPSIS OF OUR SCORECARD
15.2 BUILDING THE SCORECARD
15.3 DO OUR SCORES REALLY INDICATE ACQUISITION SUCCESS?
15.4 FROM 43 TO A 10-FACTOR SCORECARD
15.5 THE ACTUAL PERFORMANCE OF THE 10-FACTOR SCORECARD
15.6 SCORECARD DEMONSTRATIONS
15.7 CUSTOMIZATION OF THE SCORECARD BY INDUSTRY
Notes
Epilogue: How to Spring the M&A Failure Trap
E.1 CHANGE THE ACQUISITION INCENTIVES OF CORPORATE EXECUTIVES
E.2 CORPORATE ACQUISITIONS SHOULD BE THE LAST RESORT
E.3 THOROUGHLY ASSESS THE RISK THAT THE ACQUISITION WILL FAIL
E.4 AVOID HYPING THE PROPOSED ACQUISITION
Notes
Appendix: Our Research Methodology
A.1 OUR MEASURE OF ACQUISITION SUCCESS
A.2 OUR SAMPLE AND DATA SOURCES
A.3 OUR STATISTICAL MODEL
A.4 SUMMARY
Notes
Index
End User License Agreement
List of Tables
Chapter 9
TABLE 9.1 AMD’s Allocation of the Purchase Price of Xilinx as of December 31...
TABLE 9.2 Breakdown of “Acquisition-related Intangibles” for AMD’s Acquisiti...
TABLE 9.3 AMD’s Organic Growth vs. Reported Growth in the Year of Xilinx’s A...
Chapter 15
TABLE 15.1 Example of Acquisition Factors and Coefficient Estimates of a Sco...
TABLE 15.2 The Proposed 10-Factor Scorecard
TABLE 15.3 The Acquisition Scorecard of Sprint’s Purchase of Nextel Communic...
TABLE 15.4 The Scorecard of Microsoft’s Acquisition of Nuance Communications...
TABLE 15.5 Coefficients for Industry-Specific Scorecards
List of Illustrations
f04
FIGURE 1 The Increasing M&A Failure Rate Over Time (The dots reflect average...
FIGURE 2 The Percentage of Firms with Goodwill from Acquisitions Writing Off...
Chapter 2
FIGURE 2.1 The Resurgence of Conglomerate Acquisitions
FIGURE 2.2 Buyers’ Decreasing Profitability Prior to Acquisition
FIGURE 2.3 The Increasing Preference for External Acquisitions Over Internal...
FIGURE 2.4 The Rising Acquisition Premium
FIGURE 2.5 The Decreasing Use of Debt Financing in Acquisitions
Chapter 3
FIGURE 3.1 The Growth of M&A Deals and Stock Market Trends, 1980–2022
FIGURE 3.2 The Rising Share of Technology Buyers
FIGURE 3.3 The Rising Share of Technology Targets
FIGURE 3.4 The Increasing Globalization of M&A Deals
FIGURE 3.5 CPI-Adjusted Median Change of Buyers’ and Targets’ Size from 1989...
Chapter 4
FIGURE 4.1 The Market Values of AT&T versus Verizon: 2010–2022
FIGURE 4.2 The Substitution Between Internal Development and Acquisition, 19...
FIGURE 4.3 Internal Development Beats Acquisitions in Spurring Sales
FIGURE 4.4 Internal Development Generates Higher Gross Profit Growth Than Ac...
FIGURE 4.5 Internal Development Enhances Sales Stability
FIGURE 4.6 The Yearly Effect of Investment in Internal Development and Acqui...
Chapter 5
FIGURE 5.1 The Resurgence of Conglomerate Acquisitions
FIGURE 5.2 The Effect of Conglomerate Mergers vs. Same-Industry Mergers on t...
Chapter 6
FIGURE 6.1 The Average Success Rate of Acquisitions During Periods of Low, M...
FIGURE 6.2 The Average Success Rate of Acquisitions Made During Low, High, a...
FIGURE 6.3 The Average Success Rate of Acquisitions Undertaken During and Af...
FIGURE 6.4 The Average Success of Acquisitions for Different Buyers’ Share O...
Chapter 7
FIGURE 7.1 The Average Success Rate of Acquisitions in Relation to Premium P...
FIGURE 7.2 The Average Success Rate of Acquisitions Associated with Restruct...
FIGURE 7.3 The Average Success Rate of Acquisitions by Companies, Classified...
FIGURE 7.4 The Average Success Rate of Acquisitions Made Around the First Ye...
Chapter 9
FIGURE 9.1 The Median Amounts of Acquisition-Related Intangibles and Goodwil...
FIGURE 9.2 The Success Rate of Acquisitions Made by Companies with High, Med...
Chapter 11
FIGURE 11.1 The Time Span Between Acquisition and the Subsequent Goodwill Wr...
Chapter 12
FIGURE 12.1 The Weighted Average (by Deal Size) Percentage of Stock, Cash, a...
FIGURE 12.2 Technology Buyers: The Weighted Average Percentage of Stock, Cas...
Chapter 13
FIGURE 13.1 The Success of Acquisitions Made by Overconfident CEOs
Chapter 14
FIGURE 14.1 Acquisition Frequency and CEO Turnover
FIGURE 14.2 Acquisition Frequency and CEOs’ Average Annual Compensation Incr...
FIGURE 14.3 Acquisition Success Rate and CEO Tenure: 1980–2018
FIGURE 14.4 Acquisition Success and CEO Average Annual Compensation Increase...
FIGURE 14.5 Buyers’ Employee Growth Post-Acquisition and the Related Acquisi...
FIGURE 14.6 Loss of Employee Positions from Acquisition as a Percentage of B...
FIGURE 14.7 Buyers’ Annual, Industry-Adjusted, Sales per Employee Productivi...
Chapter 15
FIGURE 15.1 The Acquisition Success Rates of Buyers Ranked by Our Prediction...
FIGURE 15.2 The Acquisition Success Likelihoods for the 10-Factor Scorecard:...
FIGURE 15.3 The Average Acquisition Success Likelihoods of the General Score...
Guide
Cover
Table of Contents
Title Page
Copyright
Preface
Preamble: Why Should You Read This Book?
Begin Reading
Epilogue: How to Spring the M&A Failure Trap
Appendix: Our Research Methodology
Index
End User License Agreement
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The M&A Failure Trap
Why Most Mergers and Acquisitions Fail and How the Few Succeed
BARUCH LEV
FENG GU
Copyright © 2025 by Baruch Lev and Feng Gu. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permission.
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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
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Library of Congress Cataloging-in-Publication Data
Names: Lev, Baruch, author. | Gu, Feng, 1968- author.
Title: The M&A failure trap : why most mergers and acquisitions fail and how the few succeed / Baruch Lev and Feng Gu.
Description: Hoboken, New Jersey : Wiley, [2025] | Series: Wiley finance series | Includes bibliographical references and index.
Identifiers: LCCN 2024031604 (print) | LCCN 2024031605 (ebook) | ISBN 9781394204762 (hardback) | ISBN 9781394204786 (adobe pdf) | ISBN 9781394204779 (epub)
Subjects: LCSH: Consolidation and merger of corporations. | Success in business.
Classification: LCC HD2746.5 .L47 2024 (print) | LCC HD2746.5 (ebook) | DDC 658.1/6—dc23/eng/20240809
LC record available at https://lccn.loc.gov/2024031604
LC ebook record available at https://lccn.loc.gov/2024031605
Cover Design: WileyCover Image: Just_Super/Getty ImagesAuthor Photos: Courtesy of author
Preface
Corporate mergers and acquisitions, often the largest investment a company makes, fail to fulfill their expectations at an alarming rate of 70–75%. You wouldn’t know this grim and highly damaging fact if you just followed the uniformly upbeat and enthusiastic merger announcements made by the acquiring and acquired executives, replete with highly optimistic promises of substantial synergies (cost savings), development of revolutionary products and services, or new markets to be penetrated by the proposed merger partners. Alas, most of those statements are sheer wishful thinking and sometimes hype, designed to garner investors’ support for the merger. The fact, backed by our rigorous evidence, is that most mergers and acquisitions (M&As) fail, causing massive losses to shareholders of the acquiring companies, and serious dislocations to employees, customers, and suppliers. The acquisitions’ high failure rate is a widespread, and still growing, debacle.
In this fully evidence-based book, we first empirically substantiate our contention that M&As are largely a “failure trap” and then unveil the reasons for the persistence and even increase in the disappointment from corporate acquisitions. Most of these failure drivers will surprise you. We then use a very large sample of 40,000 acquisitions, coupled with advanced statistical techniques to identify the major attributes of successful acquisitions, aimed at springing the M&A failure trap. Finally, we develop a first-of-its-kind and easy-to-use 10-factor scorecard designed to predict the success likelihood of a proposed acquisition, to be used by executives and directors currently considering a proposed acquisition, or by shareholders asked to vote on a merger proposal. Importantly, no technical or statistical knowledge is required to benefit from this book.
This book will be of considerable interest to corporate executives and directors, who will likely be involved in M&As during their careers; to investors asked to vote on merger proposals or who are considering investment in the acquiring companies; and to business professionals in general, economists, and university instructors interested in one of the most important and consequential economic events – business acquisitions.
We are grateful to Ms. Nancy Kleinrock for the outstanding and very helpful editing of this book, to Wiley’s editors for guiding us through the book’s publication process, and to Eli Amir, Rachel and Tom Corn, Elizabeth Demers, and Michael Mauboussin for helpful comments on parts of this book.
We sincerely hope that this unique and timely book will reverse the destructive path of corporate acquisitions.
Preamble: Why Should You Read This Book?
You probably believe that mergers and acquisitions (M&As) – often the largest investments companies make: think Exxon, paying $60B for Pioneer Natural Resources in October 2023, for example – are a boon for investors and employees, leading to new revenue and profit growth for the buying enterprise. How wrong. In fact, research shows that an astounding 70–75% of all acquisitions fail to live up to expectations, at shareholders’ expense, of course. Sprint, the third largest U.S. wireless carrier, acquired Nextel, the fifth largest carrier, for $35B in February 2005. Executives of both companies waxed lyrical about the merger. Timothy Donahue, Nextel’s chief executive officer (CEO), declared, “The new powerhouse company has the spectrum, infrastructure, distribution, superb and differentiated product portfolio that will drive our continued success.” Cost savings of $12B were predicted from the merger. Alas, a mere three years later, Sprint wrote off – declared a loss of – $30B (86% of Nextel’s acquisition price). This wasn’t an aberration. It was more of the norm.
P.1 THE M&A FAILURE TRAP
A few are aware of this carnage. Warren Buffett, who knows a thing or two about corporate acquisitions, having done them all his professional life, declared metaphorically:
Many managers apparently were overexposed in impressionable childhood years to the story in which the imprisoned handsome prince is released from a toad’s body by a kiss from a beautiful princess. Consequently they are certain their managerial kiss will do wonders for the profitability of the company’s [acquisition target]… . We have observed many kisses but very few miracles. Nevertheless, many managerial princesses remain serenely confident about the future potency of their kisses – even after their corporate backyards are knee-deep in unresponsive toads.1
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.”2 Harvard’s late Clayton Christensen, of the “disruptive innovation” fame, reported that studies have documented an unbelievable M&A failure rate of 70–80%, while KPMG, a leading accounting firm, estimated more precisely the M&A failure rate at 83%.3
That “not acquiring” is often better than “acquiring” companies was demonstrated empirically by a clever academic study of contested (multibidder) acquisitions, where the successful corporate buyers were compared with the other, nonsuccessful bidders for the same targets. The researchers reported that the presumed “losers” – bidders that failed to buy the target – outperformed the “winners” by a substantial 25–30% risk-adjusted stock returns, over a three-year post-acquisition period. The researchers aptly titled their paper “Winning by Losing.”4
The dismal performance of M&As, both in the United States and abroad, whether measured by buyers’ post-acquisition sales and earnings growth or by their stock performance, did not go unnoticed by investors. In fact, in recent decades, a company’s public announcement of a planned acquisition generally triggers a significant stock price drop, reflecting investors’ dour expectations from the proposed acquisition. Thus, for example, on May 23, 2022, Broadcom announced its intention to acquire VMware for $60B and saw its stock price fall by 3% on the announcement day. Similarly, the stock price of Tapestry, which owns Coach, Kate Spade, and Stuart Weitzman brands, dropped by 15% on August 10, 2023, when it announced the acquisition of Capri Holdings, owner of Michael Kors, Versace, and Jimmy Choo, thereby reflecting deep investor concerns about the prudence of the acquisition and its terms.
Despite all that negativity, the pace of M&As does not abate; in fact, as we show in Chapter 3, it grows. And the architects of the mergers – CEOs of the buyers and targets – are as enthusiastic as ever about the mergers’ prospects, uniformly predicting enticing synergies (cost savings) and fabulous revenue and earnings growth resulting from the mergers. How can this be? What’s the basis for managers’ continued trust in M&As, despite their dismal, proven record? Optimism in the face of destruction? That’s one of the major questions we ask and answer in this book, which is fully evidence-based, using a sample of more than 40,000 actual acquisitions, analyzed by advanced statistical techniques. The answers will highly surprise you.
But we do much more in this book. We identify the major reasons for the success or failure of corporate acquisitions, many of which have not been highlighted or discussed in the vast extant literature and advice available on M&As. To top it all off, we develop in Chapter 15 of this book a unique, numerical M&A scorecard, aimed at assessing (predicting) the potential success of a specific acquisition, for the use of executives considering a merger proposal, corporate directors overseeing managers’ decisions, and investors, who are sometimes asked to vote on a proposed merger or who want to make investment decisions regarding the merger partners.
Addressing these three major issues – explaining the persistence of the M&A phenomenon in spite of its harsh failure rate, identifying the major factors determining an acquisition’s success, and developing a predictive numerical scorecard assessing merger consequences – should be of major interest to every businessperson, corporate manager, director, investor, economist, and business student, given the centrality of M&As in the economy and corporate success. Intriguingly, the urgency to address the merger growth conundrum is even greater, given our following finding that acquisition consequences deteriorate over time – a matter that is reported here for the first time.
P.2 M&A DECISIONS ARE GETTING WORSE
Do executives learn at least from their failures? The Wall Street Journal thinks so, quoting merger advisers: “Companies can get better at doing successful mergers and acquisitions.”5 Perhaps they can, but they do not. M&As defy the universal learning curve rule: rather than benefiting from experience and improving their M&A decisions and consequences, executives’ acquisition decisions are in fact getting worse over time. They are “unlearning,” rather than learning. Using likely the largest sample assembled for M&A research – more than 40,000 deals conducted over 40 years6—along with a comprehensive merger success measure 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.7
What we find startling, however, is the “reverse learning” (forgetting?) phenomenon exhibited in Figure 1,8 which portrays the average annual failure rate of M&As. The figure shows clearly that the merger failure rate is trending upward. From typical 50–60% acquisitions failure rates in the 1980s and 1990s, the failure rate (buyers’ post-acquisition financial and stock market performance lagging pre-acquisition performance) rose to 60–75% in the 2000s (for the sake of conservatism we eliminated from the figure the financial crisis years, 2006 and 2007, due to unusually high acquisition failure rate of 85–90% in those years). The regression trend line in the figure, reflecting the overall failure pattern, is significantly upward-sloping, indicating the decreasing quality of corporate M&A decisions over time. A slight improvement occurred in the post financial crisis years.
FIGURE 1 The Increasing M&A Failure Rate Over Time (The dots reflect average annual M&A failure rate for the period 1980–2018, excluding 2006–2007, plus a regression trend line.)
And yet, one hears from time to time, particularly from investment bankers and M&A consultants, that corporate acquisition decisions have been improved over the past decade or two.9 So here is out of the mouths of (not babes, but) corporate managers their view of the quality of the M&A decisions they have made in the past 20 years. Figure 2 presents both the number and total volume of annual “goodwill write-off” (impairments) declared during 2003–2022. A goodwill write-off (fully explained and demonstrated in Chapter 9) is a usually very large income statement expense and asset value decrease, reflecting a total or partial loss of a company’s past investment in a business acquisition. In other words, it’s managers’ public admission that an acquisition failed.10Figure 2, derived from public companies’ financial statements, shows anything but an improvement of corporate acquisitions: from 10% of all companies with goodwill on their balance sheet (practically every corporate acquisition generates a substantial amount of goodwill on the buyer’s balance sheet) declaring a write-off loss in 2003 (316 firms), the percentage of write-offs went steadily up to 20%, for a total of 564 firms, in 2022 (see top line and left axis). That’s a doubling of the annual percentage of corporate buyers declaring failed acquisitions! As to the amount of investment losses imposed on shareholders, the bars in Figure 2 (and the right axis) show that the total write-offs (losses) increased from $30B to a staggering $190B a year between 2003 and 2022. The average amount of goodwill write-off per firm (not presented in the figure) more than tripled during this period, from $104M to $335M.11
FIGURE 2 The Percentage of Firms with Goodwill from Acquisitions Writing Off Goodwill, and the Amount of Goodwill Write-Offs ($ Billion)
We really find it hard to reconcile Figure 2’s grim data, publicly reported by the acquiring companies, with a view that the quality of corporate acquisitions improved over the past two decades.12
Finally, readers who may not be impressed by our statistical evidence indicating the poor and worsening record of corporate acquisitions should read the following excerpts from a recent Wall Street Journal front-page article:
Big Media Deals Aren’t Living Up to the Hype. Warner’s CEO Wants to Do Another One
Streaming is losing money. Box-office receipts are underwhelming. Cable networks are dying. The entertainment industry is badly in need of a plot twist – and Warner Bros. Discovery boss David Zaslav is ready to supply one in the form of yet another blockbuster media merger. Zaslav met this week with Paramount Global CEO Bob Bakish and discussed the possibility of a deal between the media giants… . The logic of a Warner-Paramount pairing: overlapping cable networks and studio operations would translate into billions in savings. And Warner’s Max streaming service would be supercharged with content… . If this story line sounds familiar, it’s because it’s a rerun played many times over the past decade. Giant mergers have been the response to virtually every big problem confronting the entertainment industry’s titans. But so far, the results from these big deals aren’t impressive. “These things just extend the runway, but they don’t change the destiny of where they are going,” said Andre James [Bain & Co.]… . Many media observers and analysts are skeptical about the merits of a Warner-Paramount deal. If the goal is a partnership in streaming, there are other models to explore – a bundled offering of services at a discounted price, or a joint venture – before jumping into an all-out merger.13,14
Thus, one bad giant deal is chasing another in a never-ending drama–farce, at shareholders’ expense, reminding one of the tourist who saw years ago in New York harbor the magnificent yachts of J.P. Morgan, John D. Rockefeller, and other finance and industry titans, and asked innocently: “Where are the customers’ [investors’] yachts?”
This surprising finding of bad and worse acquisitions indicates one of two things: either corporate executives and directors, with their highly paid advisers, are getting worse over time at acquiring companies, or the personal acquisition motives of executives (higher compensation, empire building, and personal risk diversification; see Chapter 13) are getting stronger, overriding shareholders’ interests. We will further explore this intriguing issue in a later chapter, but as for now the data speak loud and clear: as acquisition numbers and value increase, merger consequences are getting worse. No wonder investors are so antsy when learning about an impending acquisition and often dump the buyers’ shares. Figures 1 and 2 obviously strengthen the need to fully understand the merger phenomenon and learn how to improve its consequences, which we do in this book by focusing on the following central issues.
P.3 THE CENTRAL ISSUES EXPLORED IN THIS BOOK
What explains the very high and increasing acquisition failure rate?
Like post-mortems informing doctors how to improve health treatments, understanding the reasons for past acquisition failures is crucial to enhance the merger success rate. The failure of a complex and time-consuming process like a corporate merger cannot, of course, be explained by one overall reason. Life is complicated. Therefore, armed with a comprehensive measure of acquisition success (see the appendix), we analyzed more than 40,000 acquisitions worldwide to identify the major reasons for mergers’ success and failure. Obviously, given the very high acquisition failure rate, we first focused on the reasons for merger failure. The following, in brief, are the major causes we identified for the persistent acquisition failure. In the book, we elaborate, with real-life examples, on these major causes for failure.
Insufficient attention to the acquisition alternative – internal development
.
Faced with lagging sales and earnings, chronically missing analysts’ consensus earnings estimates, expiring patents, or a competitor’s entry, and goaded by commission-hungry investment bankers, executives often panic and feel
they have to act
promptly and boldly, by “doing a big acquisition” (see the cases of Teva Pharmaceutical and Hewlett Packard in the next chapter). Sometimes an immediate corrective action has to be taken, but oftentimes, with some planning ahead, the
internal development
of new products and services and the restructuring of business processes are the better solution. New products can be developed internally rather than bought, production facilities can be built in-house, and new markets can be penetrated by expanding and improving the existing salesforce. As you will see in
Chapter 4
, our calculations show that the growth benefits of internal development are
substantially higher
than those of acquisitions. Surprising but true. Yet, internal development is rarely seriously considered as an alternative to acquisition. A panicked acquisition decision usually ends up with overpayment for the target and getting a business that is a strategic misfit. This overpayment and lack of strategic fit are among the major reasons for the observed high acquisition failure rate.
“Now is the time to buy.”
A second cause for acquisition failure is the widespread belief by CEOs that they can
time acquisitions
(akin to how investors try, and mostly fail, to time the market). This is often a chimera. For example, some say that when capital markets are up, better yet sizzling, you should buy a business because your shares (the acquisition currency) are high and perhaps even overvalued. Others prefer down markets, because target shares are depressed and you can acquire “bargains.” Advisors will tell you that when your competitors are buying, you do not want to be the last standing with an empty bag. Thus, there is no scarcity of presumed “good times for acquisition.” However, our comprehensive analysis, presented in
Chapter 6
, shows that most acquisitions that were made allegedly in “good times” actually failed. There are few good acquisition times, and we point them out, but, generally, rather than looking for good times, you should look for good targets; we also point those out.
The dire consequences of overconfident CEOs
.
Jeff Immelt, at General Electric, reportedly made 380 acquisitions while at the helm of the company.
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Many of those acquisitions were not a good use of shareholders’ money. You will read in
Chapter 13
how
overconfident CEOs
, those overstating (in their own mind, or publicly) the expected benefits of their decisions, can be identified and that these executives – about 30% of all CEOs – are typically serial acquirers. Tracking the consequences of their acquisitions, we found that they are far from impressive. Being a gung-ho CEO is not a match for a thoughtful and careful corporate leader. So, here you have another, quite widespread reason for the growing acquisition failure rate – the overconfident CEO.
Conglomerate (unrelated) acquisitions
.
Amazon buying Whole Foods, Google acquiring Motorola Mobility, or Intel purchasing Mobileye are examples of conglomerate (core-unrelated) acquisitions. They were popular in the 1960s and 1970s and then fell from grace due to massive failures. Surprisingly, 10–15 years ago, conglomerates rose from the ashes, particularly among tech companies. As you’ll see in
Chapter 5
, most of these conglomerate acquisitions are doomed to fail, in our opinion, because they lack business logic – shareholders buying the shares of the two merger partners achieve the same risk diversification as the acquiring company – and managing an enterprise outside a company’s core competency is particularly difficult. The considerable number of conglomerate acquisitions made during the past decade or two have contributed significantly to the growing merger failure rate that we documented in the previous section.
Holding on to losers
.
An astute investor once said, “I made most of my money not from purchasing securities, but from selling them on time.” The selling of an investment, particularly when it’s not doing well (“out of the money”), is a wrenching decision for managers. It is hard to admit failure to yourself, and even harder to admit it to investors when the loss from the sale of a losing investment has to be reported in the income statement. Buyers’ CEOs always hope that yet another reorganization, a change of target management, or the hiring of new consultants can prevent the target’s failure, avoiding the investment write-off and the negative shareholder reaction. But this rarely happens. Rather, holding too long to failing targets drains executives’ time and reduces the market value of what remains of the target. Big losses are often the result of retaining a failing target for too long.
Increasingly weak buyers
.
You read this here for the first time. Our sample analysis has revealed that the pre-acquisition performance of the sample buyers – as measured by their pre-acquisition three-year average return on assets (ROAs) – has been deteriorating over time. Stated differently, buyers are getting financially weaker, and that’s likely a major reason for the acquisitions’ failure to revive their performance and growth. Financially weak buyers cannot afford to acquire quality targets, they have to borrow heavily to finance the acquisition, and they aren’t attractive to the target’s top talent to keep working for them. These are all reasons for the acquisition’s failure.
Summing up, there are, of course, additional reasons for acquisition failures that we investigate in the book: integration difficulties, cultural clashes, pre-acquisition target fraud, and misrepresentation (as in HP buying Autonomy, discussed in the following chapter) – but the six failure causes listed above account for the lion’s share of the massive M&A failure trap. Later in the book we elaborate on each failure cause with real-life examples and provide suggestions for how to avoid them. With this, we accomplish the first major objective of our book: answering the perplexing question of why so many M&As fail and exposing the reasons that the failure rate keeps rising. But this is not just a book about post-mortems. It’s mainly about how to improve the acquisition decision. So, let us move to the second major book objective.
How to enhance the likelihood of an acquisition success?
There is no scarcity of M&A advice in the business literature and social media: you can find books by CEOs titled “What I learned from doing acquisitions”; numerous M&A advisors and consultants publish lists of “5 (or 10 or 15 or …) things to do to assure merger success”; economists report research results on issues like the hazard of CEO over-optimism, and the disregard of cultural differences between buyer and target employees; and board members inform on “how to prevent CEOs from committing acquisition failure.” The usefulness of such advice is limited. All those M&A architects and experts recounting their experiences have, in fact, very limited M&A exposure (being typically involved in less than a handful of acquisitions), done under very special circumstances, like abnormally low interest rates, or in the wake of a financial crisis. There is not much one can generalize and learn from these public sources. As for investment bankers, their advice is often far from objective, given the fat fees they expect from an acquisition.
We use in this book an entirely different approach to improve acquisitions, whose main elements are as follows:
Comprehensive evidence:
We assembled for this book a very large sample of more than 40,000 merger cases involving publicly traded buyers (the reason: some of our measures require share prices) from both the United States and abroad. Our targets are firms of all sorts, both public and private. Our sample covers the past 40 years. That’s our database from which we draw inferences about the major determinants of M&As’ success and failure. Our approach is thus
fully evidence-based
; it contains facts rather than conjectures, anecdotes, or some limited experiences.
A multidimensional success measure:
A search for M&A success determinants requires a well-defined
success measure
, indicating what constitutes a winning acquisition. The M&A literature offers a bewildering array of success indicators: rising buyers’ stock prices when the merger is announced, sales or earnings growth over three-to-five years post-merger, or new products or services emerging from the merger. Each of those measures captures an aspect of acquisition success yet misses other success dimensions. We, in contrast, include three critical success dimensions in our measure. Specifically, we count an acquisition a success if it fulfills
all
of the following requirements:
a positive buyer’s sales growth and/or gross margin increase, over a three-year period after the acquisition, relative to its industry average growth (a financial performance dimension)
the buyer’s share price did not decrease over the three post-merger years (capital market performance)
there was no accounting write-off of goodwill or of the merger investment (loss declaration) during the three post-acquisition years (an accounting perspective)
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Our acquisition success measure thus captures simultaneously the financial, capital market, and accounting aspects of the acquisition. We aren’t aware of any other M&A study that uses such a comprehensive success indicator. As for our sample, 36% of all acquisitions were successful by our measure over the 40 sample years. During the past couple of decades, though, the success rate declined to 30%. Thus, only three out of ten acquisitions currently fulfill their expectations. We also use state-of-the-art statistical analysis as follows:
An advanced statistical methodology:
Most acquisition studies done by consultants, advisers, or financial institutions use simple correlation analysis, like the one we recently saw claiming that the larger the number of acquisitions a company makes, the higher its acquisition success. This conclusion was derived from a correlation between the buyer’s number of previous acquisitions and its post-acquisition share price changes. Simple correlation analyses, however, suffer from several serious statistical shortcomings, such as the “missing correlated variables” problem. Specifically, in the study mentioned earlier, the missing correlated variable may be the company’s periodic cash flows. Firms flush with high and increasing cash flows tend to acquire more quality businesses
and
their share price rises quickly. So the real relationship may not be between the number of previous acquisitions and share price growth, as the consultants claimed, rather between operational success (high cash flows) and
both
increasing share prices and the number of acquisitions made. Accordingly, high cash flows may be the real driver of acquisition success, not the number of previous acquisitions. Statistics is an art as much as science.
In this book we use a multivariate regression analysis, which is the gold standard of economic and finance research (see the appendix for details). In fact, we simultaneously estimate the effect of more than 40 possible acquisition success determinants on the actual merger success. Those determinants include, among many others, the following:
Target is a foreign entity.
Acquisition payment is in the form of stocks.
Buyer and target are business-wise unrelated (a conglomerate merger).
Target is small relative to buyer.
Target is a technology company.
Target is a losing enterprise.
Acquisition was made during rising capital markets.
Acquisition premium is high.
Merger is horizontal (the partners are business related).
Buyer has considerable acquisition experience.
Our 43 variables model makes it unlikely that “missing variables” affect our inferences and recommendations and enhance the generality and usefulness of our findings. Thus, our substantially larger sample, more comprehensive acquisition success measure, and improved statistical methodology places this book on a substantially higher level than the available M&A literature. But we provide still more in this book:
A predictive merger scorecard
The third theme of this book (after explaining the reasons for the very high and increasing acquisition failure rate and identifying the drivers of acquisition success) is the development of a predictive merger scorecard. We use our 43-variable acquisition success model to build a unique “merger scorecard,” done here for the first time, to assign points to each acquisition success determinant (e.g., target is a profitable entity) and generate a summary score for a specific acquisition. This predictive merger score can be used by executives and board members, in comparison with the average scores of past acquisitions, to determine the likelihood of success of a proposed acquisition, and by investors asked to vote on an acquisition. In other words, our detailed acquisition scorecard provides decision-makers with a numerical forecast for an acquisition’s success. We cannot overstate the importance of this new tool for people dealing with M&As. We deferred the development and exposition of the scorecard to Chapter 15, because its full understanding requires many of the concepts, findings, and recommendations we develop in the preceding chapters.
A spotlight on the human element: CEOs and employees involved in M&As
We conclude the book with a thorough examination focused on the main acquisition players – the buyers’ CEOs, and employees. This human resource aspect of M&As is rarely discussed in the acquisition literature. We empirically address questions like, are CEOs compensated for acquiring businesses, irrespective of their success or failure? Does acquisition failure hurt the CEOs’ career and tenure? What happens to the buyer’s and target’s employees after the merger? In short, we examine here the human element involved in M&As.
P.4 FINALLY, WHO SHOULD READ THIS BOOK?
Everybody, of course. Seriously, if you are a corporate executive or a director considering a business acquisition, you will learn from this book how to avoid the major pitfalls dooming an acquisition, such as a conglomerate merger. You will also find out the major changes you should make in the acquisition terms, like substitute cash for stock payments, to improve the acquisition’s success prospects and its reception by investors. Importantly, we also provide readers with a unique, predictive acquisition scorecard that will enable them to compare the prospects of the acquisition considered with those made by your peers. This information will enable decision makers to avoid the devastating “M&A failure trap.”
If you are an investor asked to vote on an acquisition proposal, or consider whether to buy or sell the shares of the proposed merger parties, our book highlights for you the major acquisition and target attributes – like a target that is a foreign entity, a large debt raised to finance the acquisition, or the target sustaining a series of pre-acquisition losses – that will likely cause an acquisition failure. Our acquisition-specific scorecard will summarize for you the likelihood of an acquisition’s success.
If you are a business professional, an economist, or just someone who is generally interested in economic issues and is perplexed by the frequent news about large merger failures or massive goodwill write-offs, our book will clarify for you the reasons for those, often colossal, managerial acquisition mistakes and how they could have been avoided.
Lastly, if you are a business school or economics university instructor, some of your courses likely deal with various M&A issues, such as the M&A role in business strategy, the financing of corporate acquisitions, or the accounting for mergers. Our book will be an easily accessible and readable reference for your students.
So, whoever you are, please join our following M&A journey to success.
Notes
1
Buffett, W., 1981, Berkshire Hathaway, Annual Report. (Quoted by Malmendier and Tate, “Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction,”
Journal of Financial Economics
89 no. 1 (2008): 20–43).
2
Quoted from McCaffrey, P., 2019, “Aswath Damodaran on Acquisitions: Just Say No,” CFA Institute, February, 28.
3
Christensen, C., R. Alton, C. Rising, and A. Waldeck, “The Big Idea: The New M&A Playbook,”
Harvard Business Review
, March (2011): 1–21.
4
U. Malmendier, U., E., Moretti, and F. Peters, “Winning by Losing: Evidence on the Long-Term Effects of Mergers,”
Review of Financial Studies
31 (2018): 3212–3264.
5
Dummet, B., 2023, “It’s far from a sure thing,”
Wall Street Journal
, September 17.
6
There were, of course, many more M&A deals over the past 40 years than 40,000. As we explain later, for purposes of our research we required for many of our tests the acquiring firms to be
publicly traded
so that we could observe their stock prices (investor sentiment). This eliminates from our sample acquisitions by private companies. The target companies in our sample aren’t restricted to public firms. Our sample, though, while restricted, contains most of the large and economically consequential deals performed during the past 40 years.
7
We explain the details of our measure of firms’ M&A success rate in the
appendix
of this book. Briefly, we define successful M&As as those meeting three requirements: the acquirer’s three-year postacquisition, industry-adjusted sales growth is positive and/or gross margin growth is positive, the stock price of the acquiring firm does not decrease postacquisition, and the buyer experiences no goodwill write-off in the postacquisition period.
8
Figure 1
ends in 2018 because our “acquisition success” measure (see the
appendix
) includes the acquirer’s sales and cost of sales growth, as well as stock returns for the postacquisition three to four years, which extends to 2022 for the year 2018.
9
For example, see the
Wall Street Journal
, September 17, 2023, ibid.
10
For example, in March 2024, Walgreens reported a $5.8B write-down in the value of its investment in primary-care clinic chain VillageMD. Consequently, Walgreens’ net loss in the second quarter was $5.9B, compared to net earnings of $703M in the same quarter a year earlier.
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