When we read economic or business news we usually find information related to the acquisition or merger of companies. This is common since mergers or acquisitions are a way to grow, cover larger markets and increase competitiveness.
Economic globalization has only increased the size and number of these types of mergers. The mergers of the early 2000s, based on the technology bubble, are paradigmatic as they ushered us into a century of mega-mergers and multi-billion dollar acquisitions.
But why do companies merge? Mergers are encouraged by periods of economic prosperity and positive stock market prices in a scenario of low interest rates.
When the stock market shows positive signs, companies start to be worth more and can therefore increase their capacity to borrow to acquire other companies. At the same time, low interest rates allow companies to borrow to buy and sell other companies, i.e., in real terms, their ability to pay increases.
When mergers or acquisitions occur, they are generally aimed at reducing costs through more efficient management, improving revenues, growing – by expanding presence in the current market or penetrating new markets – and increasing the company’s market share in order to achieve more dominant positions.
Corporate mergers or acquisitions also aim to create financial synergies. A company with excess cash but few real growth opportunities may be merged into a company with projects that are expected to yield high returns but without the financial resources to undertake them.
These major corporate changes also seek tax benefits, greater debt leverage, among many other reasons.
In general, mergers and acquisitions tend to take place in a context of economic expansion, when low interest rates prevail in the economic-financial environment. It is a phenomenon that has also been driven by globalization, which has increased competition and prompted political and legal decisions aimed at deregulating markets to eliminate restrictions on international ownership, encouraging the activity and operation of transnational companies.
Do corporate mergers and acquisitions always work out?
No, this is not always the case. The opportunity factor is a determining factor when we talk about the causes of success or failure of a merger or acquisition. There are multiple factors involved, but let’s mention some of the main ones: company resources, legal and regulatory restrictions, macroeconomic environment, etc.
When a merger does not work, it is often due to insufficient research of the company to be acquired or intended to be merged. It is essential to understand the business on which the acquired or acquired company is based.
Mergers and acquisitions solve problems in the short term, but entrepreneurs must look beyond that and think primarily in the medium to long term. The factors that most often influence business failures have to do with the inability to overcome practical challenges.
One aspect that is often overlooked or marginalized during merger and acquisition negotiations is insurance. It is important to consider all the details, such as the need for a good rep and warranty insurance, in case of any breach in the process.
During this type of process it is also necessary to take into account the liability risks of the deal that could be covered by insurance. A liability risk can result in a party being held liable for certain types of losses, which is a frequent occurrence in the aftermath of corporate mergers.
Disastrous corporate mergers
As we have indicated, mergers between large companies can generate growth and seek to consolidate or dominate a specific industry.
When these moves occur, good news and positive results are always expected, but sometimes the opposite happens. There are failed investments, leadership problems or cultural differences that can ruin any positive effects of a merger or acquisition.
Many deals don’t even make it past the negotiation stage. Many things can play a role, from corporate cultural differences to leadership clashes, not to mention last-minute financial problems or the unforeseen emergence of external circumstances that complicate and jeopardize the merger or acquisition.
Among the paradigmatic cases of disastrous mergers we can cite the merger of the technology company AOL and the multinational media company Time Warner (2001). It was an operation valued at 111 billion dollars. In 2009 Time Warner announced its definitive separation, after its shares fell by 80%. It has been considered the worst merger in history.
At the turn of the century, shortly after the merger, the dotcom bubble burst, which caused AOL to lose a lot of stock market value. A proper financial review was not executed before the merger was finalized. There were risks because they were two very different companies in terms of corporate culture.
Another disastrous corporate merger occurred in 1998, when Germany’s Daimler-Benz and U.S.-based Chrysler merged in what was at the time the world’s largest corporate automotive deal.
A deal that failed due to the incompatibility between its main promoters. Once again, the clash of two different corporate cultures ruined a mega-merger. The merger between Chrysler and Daimler-Benz was not even a decade old.
Another disastrous example of a mega-merger occurred in 2005, with the merger of two large U.S. telecommunications companies, Sprint and Nextel, which were intended to be stronger competition for Verizon and Cingular (AT&T).