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Reasons for M&A failure - the case of overconfidence and lack of expertise

It is very rare for the financial news to analyse the failure potential of mergers at first, it is typically once the deal has been completed and a certain period of time has elapsed, that analysts start the critical analysis. However, there are deals, for example the Allianz and Dresdner Bank merger, where many industry experts expressed serious doubts even before the deal was completed.

The main reasons why some M&A deals have failed are as follows:

  •  Time - M&As are typically carried out in a very short period of time and thereforedue diligence is difficult to achieve;
  •  company integration and human resources - it is difficult to join two different companies with usually different corporate cultures and styles. It is especially difficult when it comes to cross-border mergers and this is an issue that many companies choose to ignore. In many cases, banks or insurers are working towards their aim, namely, the expansion through acquisition of the new business, and do not consider the risks of such integration. This integration is even more difficult when it comes to banks merging with insurers, even in the domestic markets. Banks and  European Central Bank, (2000), ‘Mergers and acquisitions involving the EU banking insurers are essentially completely different types of businesses, they manage different types of risks and their investment strategies vary, therefore a merger canbe difficult to achieve. This is why many banks and insurers choose to form joint ventures rather than merge; since they would rather not expose themselves to the risk of acquiring a business that can bring more losses than gains in the future.This is an important issue, since M&A deals usually do not show any gains straight after the deal takes place, and it takes time, even years, for the new company to achieve profitability;
  •  over-confidence and vanity - this is a very important factor, according to Mr Soudah from MilleniumAssociates (Mr Soudah is the founder of Millenium Associates), and it was one of the key issues in the Allianz-Dresdner deal. This factor may take over when the top management may simply wish to become global, or enter a bancassurance deal, without looking at the potential profits, and ignoring the warnings. About 60% of M&A deals are unsuccessful because they approach the deal with overconfidence and instead of taking into account all the facts, they choose to pursue their goal of global expansion. It is important to note that global expansion does not immediately mean profitability and success, since managing global operation means that the company is continuously challenged with new problems when entering new markets and sectors. If for some reason, these problems become too vast, like for example in the case of Egg’s entry in France, the losses can have a devastating impact on the entire company;
  •  lack of long term view - this is reflected in the fact that many analysts and managerscan only look to the short term. Investment managers want to be able to see profits in the same year, not in two years’ time, and M&A deals are not the type that will yield profits in the short term, as mentioned previously;
  •  management – short-term view and lack of expertise. It is considered to be one of the key aspects of M&A activity. Short sighted management decision-making can lead to significant financial failures, similarly, efficient and well informed managers, who know their company’s strengths and weaknesses thoroughly, can lead the deal to success. In many cases company managers act just like fund managers, where the horizon is short term and results are expected by the end of the financial year.
What have been learned from the past experiences. According to the experts interviewed, top managers usually show very short memory of  past events (this has also been proven in many studies analysing financial behaviour), and very rarely learn lessons from mistakes made in the past. Therefore, it is typically the case that even important decisions are being made with a short-term view, based only on the current situation, without learning from past mistakes or even taking into account opinions from independent advisors. Although it seems that the company might be looking long-term, explaining that the deal is aimed at profit and efficiency maximisation, often in reality decisions about M&A are made by top managers without looking at  the financial evidence, and are based purely on what seems right or what would be ‘good to have’, for the company to expand in size and become more global, which does not necessarily mean profitability or efficiency. In the case of the Allianz-Dresdner Bank deal, top management ignored the warnings from the outside about the problems that Deutsche Bank faced, for example, the high cost to income ratio, and proceeded with a deal which at the time was considered to be unwise.

Achieving successful M&A – get to know your business

A key to a successful merger is the ability to identify the potential problems and take into account the interests of employees and investors. The managers must ensure that both employees and investors are supporting the deal and in order to achieve that, top management has to be able to approach the merger from both the investors’ and employees’ point of view in order to win credibility. Employees must believe that the merger is best for the company, and will enable the company to grow and be more profitable in order to gain from the merger, as individuals. Investors and shareholders also need to be convinced about the rationale for the deal. The acquisition premium means that an amount of their fund will be transferred to the
target company and such a move needs to be justified. One example of how this aim was achieved is the merger between Bank of Scotland and Halifax, which resulted in the creation of HBOS. When combining the products offered by Bank of Scotland with the extensive distribution channel owned by Halifax, a strong group able to compete in the UK banking market was produced. This particular deal was a one-for-one share exchange with no acquisition premium by either party. (For more information about

The risk involved in M&A

When analysing mergers and acquisitions it is important to understand the risk involved.The main, most risky issue is valuing the company to be acquired. According to a study conducted by the Boston Consulting Group in 2002, ‘The M&A Maze: Showing Employees and Investors the Way’vi: “The dizzying pace of global mergers that characterised the late 1990s has slowed, but CEOs in many industries, including financial services, are still searching for acquisitions that can add long-term value to their companies. The high level of uncertainty surrounding today's markets and the recent lowering of price-earnings ratios may, in fact, make the present an especially opportune time for bold moves. But senior executives are also aware that many acquisitions in recent years have failed to deliver anticipated cost and revenue synergies. These shortcomings have been clearly reflected in the share prices of acquiring companies. For example, a recent study of more than 300 corporate mergers between 1995 and 2001, conducted with The Boston Consulting Group, revealed that fully 61% of buyers destroyed the wealth of their own shareholders, as reflected by their stock price a year after the merger was announce. The main problem with merging or acquiring an institution is therefore estimating the potential costs and gains. Combining different systems and corporate cultures add to the problem. However, according to the industry experts, the main difficulty, often underestimated by merging businesses, is the fundamental change that they will have to go through. This applies to every single aspect of how the company is run, namely the business style, the corporate culture, investors’ and employees’ attitudes  towards the merger.

The aim of M&A is to create a business that would be more valuable than the premerger business, because this is the only way that M&A rationale can be justified. However, in the great majority of M&A, the acquirer’s stock price declines after the deal is announced, which indicates that in the majority of cases investors are sceptical about the outcome of the deal.

Other risks include irrational bidders, trying to pursue the deal only for the sake of bidding, in this way shifting the price up and forcing the company with a genuine interest in the acquisition to pay a very high price. According to a study by Julie Wulf, a professor at Wharton School, University of Pennsylvaniavii, CEOs often complete deals that are for their own benefit rather than in the interest of the shareholders. This is especially the case with top management in poorly performing companies and those in rapidly consolidating sectors, and this is where those at the top of the management structure are more interested in securing their position within the company rather than negotiating the best deal for the shareholders.

Source-Business Insights- MERGERS AND ACQUISITIONS IN  EUROPEAN FINANCIAL SERVICES- Best practice, future forecasts and strategies for success.

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