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The danger of merger

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A.B.A. ▼ | April 25, 2010
We are in crisis and that's a good time for mergers and acquisitions. But, M&A can go both ways: it can bring value to shareholders, but it can also ruin both companies.
Mergers and acquisitionsWe are in crisis and that's a good time for mergers and acquisitions. But, M&A can go both ways: it can bring value to shareholders, but it can also ruin both companies.

Most mergers and acquisitions activity involves relatively small companies that don’t show up on the mainstream business radar. Mega-mergers, by contrast, are widely reported and they provide excellent object lessons for smaller deals. Let's on three examples what can go wrong if M&A is done quickly, without thinking. And remember, if it can happen to the biggest, it can happen to your company too.

The deal between Hewlett-Packard and Compaq was worth 25 billion dollars. "we can create substantial shareowner value," said HP in 2001. What happened? HP laid off thousands of former Compaq employees, and during the resulting internal turmoil, HP stock dropped and profits remained flat. While HP tried to market and differentiate two brands of PCs, archrival Dell picked up market share.

It wasn’t until four years later, after HP’s CEO left the company, that the two organizations began working well together. Fortunately, by that time Dell began to show some weakness of its own, allowing HP to finally become the world’s largest PC vendor.

So, don’t try to swallow something larger than your own head. If the company you’re acquiring is almost as large as your own, it’s going to take major amounts of time and effort to work the people issues and organizational details of the new company. If the merger is too complicated, you may not survive the process.

America Online and Time Warner set the biggest deal in history, worth 350 billion dollars in 2000. This particular merger became the poster child for dot-com grandiosity. AOL stock plummeted to less than a tenth of its premerger price, while the much-vaunted synergies never seemed to develop. When users abandoned AOL in droves, the division was forced to change its business model from a paid alternative to the regular Internet to nothing more than a tier-two Web portal.

The morale of the story: The bigger the hype, the harder the fall. You never want your investors and customers to think that the long-term success of your company hinges entirely on the success of a single merger and acquisition. Too much can go wrong and, if it does, you look very, very foolish.

Daimler-Benz and Chrysler announced that 1998 merger with these words: "Our companies share a common culture and mission We will be ideally positioned in tomorrow’s marketplace". Well, not quite. Despite "common culture", the two firms never lived together happily, probably because Chrysler was a mass marketer and Daimler was a niche marketer.

Additional friction stemmed from differences between the German and American ways of doing business. Synergies proved elusive, and the anticipated economies of scale never materialized. Daimler recently dumped Chrysler at a fire-sale price to a group of private investors.

The lesson learned: You have to spend the time to determine whether or not the two firms are compatible. If there’s too big a difference between the two cultures, executives from the two firms will keep fighting until one side is completely exhausted. But by then there may not be much left to sell off.

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