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Study notes

Evaluating Mergers and Takeovers

  • Levels: A Level
  • Exam boards: AQA, Edexcel, OCR, IB

Why is it that many mergers and takeovers fail to achieve the gains / benefits claimed before the integration took place?

Revision Video: Why do many takeovers and mergers fail?

Why many takeovers and mergers fail - revision video

Many takeovers and mergers fail to achieve their aims - according to recent research from KPMG, 90% of mergers and acquisitions fail, compared with around 40% - 50% of marriages!

  1. Debt: Huge financial costs of funding takeovers including the burden of deals that have relied heavily on loan finance
  2. Integrating systems – companies might have very different technology systems that are expensive or impossible to marry. EBay bought Skype for $2.6 billion in 2005, only to sell the company four years later for $1.9 billion – they were unable to integrate their technological systems successfully
  3. Share price: The need to raise fresh equity through a rights issue to fund a deal which can have a negative impact on a company's share price. Over the three to five years after the deal on average, the share price of the acquiring company tends to drop
  4. Clash of cultures: Many mergers fail to enhance shareholder value because of clashes of corporate cultures, priorities and personalities and a failure to find the all-important "synergy gains“ - Cultural incompatibility is common in the case of cross-border acquisitions
  5. Loss of human capital: The business may suffer a loss of personnel & customers post acquisition i.e. people who do not wish to buy goods and services from an enlarged company.
  6. Paying too much: With the benefit of hindsight we see the 'winners curse' - i.e. companies paying over the odds to take control of a business and ending up with little real gain in the medium term. A really good example would be the doomed takeover of ABM-AMRO by Royal Bank of Scotland in 2007.
  7. Job Losses: Integration often leads to sizeable job losses - Google, which acquired Motorola Mobility (a manufacturer of mobile phones) for $12.5bn announced that it planned to make 20% of Motorola's workforce redundant
  8. Bad timing – mergers and takeovers that take place towards the end of a sustained boom can often turn out to be damaging for both businesses.

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