M&A activity in Asia-Pacific is down more than 25% from its 2007 peak, but eventually, inexorably, it will begin to rise. It’s an odd activity: planned by the numbers people, mergers invariably run aground on what’s derisively called the soft stuff. Here's a note on the wreckage.
Ostensibly, you merge to create value: either you cut costs by eliminating duplicate operations, or, more rarely, you plan to increase sales by unlocking value in markets neither company alone could access.
But do mergers create value? Since academics began crunching the numbers in the mid-1980s, the answer has always come in various flavours of no. For example, there’s evidence that acquirers, at least in cash-only mergers, bid about 15% over the going price. And they purchase a poisoned chalice: over three years, their stocks lag the stocks of the first loser (that is, the stock of the company that was second in a bidding war) by 50% (yes, 50%). You’ll find various figures if you want to disaggregate this - one HBR Ideacast says 70%-90% of mergers “fail”, and an often-cited report by KPMG at the turn of the millennium found that just 17%, or one in six, actually created value, while 30% made no difference, and up to 53% destroyed value. (Not that this was always evident to the company: as KPMG reported, four out of five directors believed that the deals were a success.)
At this point, we could ask why anyone bothers. That would lead us to courtiers and kings - to the I-bankers and consultants who produce the numbers, and to the CEOs looking for return on ego. But I’d rather flip the question. Who suffers when mergers fail?
Obviously, shareholders do. But they’re not the only ones. Mergers hit employees, and hard: they create uncertainty about job security, which ripples out across workers’ families, and often isn’t resolved for months. As the org chart is redrawn, the deck is also reshuffled for power relationships, which is often more harrowing than the simple threat of the axe. And mergers ride roughshod over tradition, chucking out “our way” for “their way,” or - if the thing is done well - at best for “the new way.”
It’s odd that the human cost of M&A has received so little attention. Though a French psychiatry journal reviewed reactive “psychoneurotic states… subsequent to business mergers” as long ago as 1967, the pickings are sparse over the next four and a half decades, and what little you’ll find in the scientific literature is mostly anecdotal. (That said, psychiatrist Arthur Lazarus’ tragicomic account of being merged and acquired six times during the 1990s is worth reading.) Most recently, researchers found in 2012 that employees’ risk of generalised anxiety disorder almost tripled (from a baseline of 2.4%) in the year following a merger.
When a board approves the CEO’s plan to merge or acquire, it rubber-stamps a lottery ticket bought with someone else’s money. That violates the reason we have directors at all. But it also breaches a duty of care: it’s foreseeable - not just reasonably foreseeable, but eminently foreseeable - that a great many people will be hurt. Until we figure out a way of predicting whether a merger will really work, we should leave well enough alone. As things stand, mergers are immoral