Friday, February 29, 2008


“What was that!?!? Prof, did you just say M&A amounts to murder?!” My students in the strategy class (it felt like a courtroom though) were quite sarcastically belligerent in their questioning of my ardent statement, where I said that a majority of M&As destroy shareholder value remorselessly. I could sense a wave of disbelief spreading with haste within the seminar hall. Hadn’t India seen many successful M&A deals? Hadn’t the share price of Tata Steel, which was Rs.537 on October 5, 2006 (before their takeover of Corus) risen thunderingly to the Rs.750 and above range by 2008? Weren’t M&A deals actually rising unbelievably fast?

Yes, yes... and yes! Strangely, I’ve found even CEOs latching on to these very hackneyed excuses for convincing their shareholders to approve of prospective M&A deals. My tryst, though, was militantly cantankerous. The research in my defence was unimpeachable. I started with the motherlode of all institutions, HBS, whose May, 2007 research (Why M&A Deals Are Bad For Shareholders) quotes, “Most M&A deals destroy shareholder value!” How has the thinking been a few years back? The April 2004 HBS paper (Should We Brace Ourselves For Another Era Of M&A Value Destruction?) states eloquently, “In the end, M&A is a flawed process, invented by brokers, lawyers and CEOs with super-sized egos!” Mark Sirower, author of the famous book Synergy Trap, shows how, on an average, 2/3rds of all deals end up destroying shareholder value. Even the famed McKinsey & Co., once a fanatic supporter of M&As, had to accept after its M&A research through the 90s that in the US & UK, only one quarter of all M&As ever recovered the costs of the merger. Their November 2001 hallmark paper (Why Mergers Fail) stated prophetically, “The belief that mergers drive revenue growth could be a myth!” In that paper, McKinsey showed how a massive 78% of companies failed to manage significant growth over a period of three years post the M&A! Professors Weber and Camerer of Carnegie Mellon University, in April 2003, statistically showed in their benchmark thesis (Merger Failure: An Experimental Approach), that “a majority of corporate mergers fail!” The Economist reported in 1999, “Study after study of past merger waves has shown that 2/3rd of all deals have not worked!” CEO Magazine reported similarly, “75% of M&As are disappointing or outright failures!”

BCG’s sparkling July 2007 report, The Brave New World of M&As, documents, “Larger deals destroy progressively more value!... Deals that are above $1 billion destroy nearly twice as much value as those under $1 billion!” The hugely referenced Business Strategy Review‘s 2005 paper (Merging on the Miraculous) had the first line, “More than 2/3 M&As fail to create meaningful shareholder value.” The Gartner/Forbes Executive Survey of February 2007 asked top global executives to rank various business issues. ‘Managing M&As’ came last on the 25 factor list! Factors like ‘Attracting and retaining skilled workers’, ‘attracting new customers’, ‘Increasing market share’ etc were ranked miles above M&As! The Economist Intelligence Unit’s outstanding briefing (Corporate Priorities For 2007) goes better! When more than 1000 global CEOs were asked, “Which forces will have the greatest impact on the global marketplace in the coming three years?”, they ranked ‘M&A activity’ sixth from the bottom! Most hilariously, below this, were factors like ‘Catastrophic events (eg. terrorism, natural disasters)’, ‘Advances in back office technologies’, and of course, ‘Others’. The NYSE CEO Report 2008 put the final nail in the M&A coffin by giving the empirical evidence that “most CEOs think revenue growth in their own companies will be driven far more from organic growth than M&A activity!” It also shows how their is a direct correlation between organic growth and a company’s market capitalisation!

Wharton, Stanford, Booz Allen, Accenture, MIT, you name it and they have research discrediting the strategy of M&A. Factually, for every Tata Steel, there are 3 Time-AOL-Warners... When Time Warner and AOL merged in the year 2000, their combined m-cap was a smashing $247 billion. The value post merger now is a pitiable $58 billion, one reason they’re now demerging! Global M&A deals touched $4.48 trillion in 2007 (from $3.61 trillion in 2006); Indian deals touched $51.11 billion in 2007 (from $20.30 billion in 2006). My strategy professor during my b-school days gave the name “Murders & Acquisitions” to M&As. He called me up a few days back to share a brilliant piece of research, which I later shared with my intemperate students... SARS, the deadly virus, has a fatality rate of 15%; Typhoid – 10%; Severe malaria – 9%; Dengue – 3%; M&A – 75%! Ouch!!!


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