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Point of View #04 - Q1.2007 The Global Consensus on the Below-50% Level of Success of M&A transactions: Why Such Data Miss Reality? |  |
Consultants and researchers have broadly communicated on the low level of success of M&A deals. For consultants, this was a part of a common sales process, known as the "death valley journey". The problem is undoubtedly real: success rates are low. But is that understanding sufficient to cope with risks ? There is a wide consensus across the globe on the below-50% level of success of M&A transactions. The slide below provides an overview of some of the surveys done. It indicates also the primary causes of failure noted in each case.
Success rates
Interestingly enough, this level has not significantly changed despite the increase of knowledge tools and the development of PMI-related litterature. The following quotes reflect the stability of the viewpoint on the high risk of M&A and integration projects: “Research in both Europe and America shows that the gains of mergers and acquisitions are rarely as great as hoped, and sometimes are completely illusory. Infamously, the merger of AOL and Time Warner, intended to create a world-class communications and entertainment company, led within a few years to the largest losses in American corporate history.” (Financial Times, August 16, 2004).
“Most acquisitions and alliances fail. A few may succeed, but acquisitions, on average, either destroy or don't add shareholder value, and alliances typically create very little wealth for shareholders. Companies' share prices fall by between 0.34% and 1% in the ten days after they announce acquisitions, according to three recent studies in the Strategic Management Journal.” (Harvard Business Review, July 1, 2004).
“Generally, two out of three M&A’s fail to add value to the acquirer; mostly, this popular growth strategy actually destroys shareholder value.” (Financial Review, June 11, 2004).
"61% of buyers destroyed their own shareholders’ wealth. The average return for these companies is 25 percentage points below their industry peers." (BusinessWeek, October 14, 2002). Our knowledge links confirm the on-going accumulation of information with the same view.
Our viewpoint is that such statistical analysis miss 2 major aspects :
- M&A transactions are part of a competitive process. The go/no go decision reflects the perception of risk as much as the actual ability of an executive team to manage efficiently the entire process. Statistically speaking, managers do compete on transactions to the point there is 50-60% risk of failure. (see POV#08 for more)
- Such analysis do not take into account experience effects. Impact of time on the success rates of specific acquirors is not reflected. In reality, it has now been proven that experienced acquirors do develop better performance over time for similar transactions. As a matter of fact, serial buyers have defined screening criteria in a way wich forces routine-based deals and bans alternative strategies.
Conclusions - Recommendations. A considerable litterature has been developped on M&A deals, emphasizing on their low level of success. A simple methodology based on multi-factor analysis is often implemented, relating success measures to risk mitigation criteria for a given sample of deals. Such analysis are useful when considering M&A and PMI from a macro-economic perspective. But for experienced managers, the interest of such data is less relevant, as it does not adress two major business issues: how to leverage business integration experience over time? how to ensure that, knowing the competition will evolve and go for more complex deals and hence higher risks, there is an action plan to build a better approach and a sustainable competitive edge? These two questions are key ones when considering the M&A/PMI process as a major building block of a corporate strategy. Author: Gilles Ourvoie (gilles.ourvoie@pmifactory.com). Gilles has worked for c.15 years on strategy and PMI projects for major international groups. Within the Strategy & Transformation consulting activity, he has developped the French PMI Center of Excellence at Gemini Consulting and Capgemini (1997-2004). Between 2004 and 2007, he has launched the Transaction Integration Services practice of Ernst & Young France (within the TAS Corporate Finance), and in the CWEA Area (Italy, Spain, Belgium). As such, he was part of the TIS Global Leadership Team. Since 2007, Gilles is Partner at PMI Factory.
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