The business practice of restructuring companies by forming one company from two separate ones is known as Mergers and Acquisitions (M&A). The practice of merging different companies has become widely employed in recent years, and there have been numerous cases of both success and failure. The combined force of two businesses joining together to double their influence and power is called synergy, and it is the core strength of M&A deals (Renneboog & Vansteenkiste, 2019). While there have been times when the merging of two and more companies did not yield the predicted results, the practice continues to be commonly used, and business companies still consider it a risk worth taking.
Success and Failure of M&A
While M&A is gaining more popularity with time, the practice still has many examples of unsuccessful merging. An M&A deal is considered a failure if it lowers the company’s value: an infamous example is America Online and Time Warner merging in 2001 (Patel, 2021). The companies rushed to merge without taking a necessary closer look at the new media landscape, and just a year after the deal, the company lost 99 billion USD (Patel, 2021). The companies did not evaluate compatibility issues before merging, thus resulting in a loss of net value. It was a clear demonstration that even successful and profitable companies can fail and lose millions and even billions in net profit if they do not account for potential risks. Visibly profitable business combinations can be rendered unproductive if the approach to their acquisition lacks needed analysis.
On the other hand, M&A can yield excellent results when the companies have productive synergy and thoughtfully approach the matter. The most significant successful M&A example in history was Vodafone and Mannesmann combination in 1999-2000 (Lewis, 2021). Vodafone became the world’s largest mobile company, and the deal was calculated to be worth 200 billion USD (Lewis, 2021). It demonstrates that if company leaders take their time and mindfully use resources to strike a combination deal, it can positively impact their productivity and revenue. Even a single deal can leave a significant impact in the business world and change the scene, setting a precedent for other companies to follow.
When it comes to setting up an M&A deal, three phases are crucial to solidifying the agreement and proceeding with it. These phases are pre-combination, combination, and post-combination phases: the first phase determines how companies approach the deal before finalizing it. The second phase is merging, and the final step is how companies adapt to the new business environment after everything is finished. Companies commonly focus on one or maybe two phases out of three. Still, all of them are essential in ensuring that the merging will result in a successful and profitable combination.
Pre combination, Combination, and Post combination Phases
Before two or more companies become merged into one, they need to go through a pre-combination phase. Traditionally, the companies would wait for the deal to be legally cleared to invest their resources into integration safely. Due to the potential failure, neither company would share private information until the deal was signed (Nguyen & Phan, 2017). The typical aim of a buyer company would be to determine the price and convince the other company to accept the bid. Although reasonable, this approach lacks the strategic analysis necessary for a successful combination. Some ignore the pre-combination phase as something purely obligatory but not truly important, a practice that can lead to companies making significant mistakes in the combination process (Rebner & Yeganeh, 2019). The pre-combination phase is essential in determining if the companies are compatible. It is when business companies can make changes to their merging plans before finalizing the deal.
The companies need to analyze and strategize before merging: they should decide first whether it is the right time, company, or price. The buyer companies need to pay attention to more than the price and potential benefit but also cultural, human, and other factors that affect the other side of the transaction. When companies fail, it is often due to the buyer choosing the wrong company at the wrong time to merge with, as they follow the potential profit idea rather than analyze if it can have a practical implementation (Rebner & Yeganeh, 2019). If a company only seeks to acquire another company for the sake of combining its profits without taking into consideration compatibility, it can result in a weak synergy.
After the pre-combination phase is set and the deal is signed, the M&A goes through the combination phase. It is time when companies to finalize the agreement and start the merging process. The buyer starts sending information, plans, and new regulations to the company they acquired. The onslaught of information can negatively impact the acquired company’s established personnel. They lose a large portion of influence, which can negatively affect the relations between two teams and their performance (Rebner & Yeganeh, 2019). For the companies, it is essential to have a thoughtful plan on how to proceed with the acquisition to minimize any difficulties that can happen during the combination phase. If the company does not pay the necessary attention during this time, it can negatively impact the resulting M&A and lead to an array of issues during the post-combination phase.
The post-combination phase happens after the deal with signed, set, and processed. Typically the main work that is done during this phase is damage control after two companies merge. It happens due to some employees, including high-ranking workers, leaves the company: a common reason for the failure of company leaders to integrate two different businesses, their practices, and work cultures. It can be prevented early if the companies approach the pre-combination phase with clarity to decide what they want to achieve and what issues may arise as a result of M&A.
The M&A can be an excellent opportunity for companies to grow and enrich their business potential. A successful and well-planned merging can significantly increase a company’s value, influence, and capabilities. On the contrary, when the mergers treat it thoughtlessly without applying a pre-combination analysis, it can result in a considerable value loss for the companies involved. The primary reason why M&A fail is not the practice itself but rather the way companies implement it and approach the merging. Many political and financial issues happen in combination, and often companies choose to deal with them as they happen instead of preparing ahead. Such mistakes can be devastating, but when M&A deals are treated with thoughtful planning and research, they can rejuvenate companies and bring great success.
Lewis, M. (2021). Examples of the most successful company mergers and acquisition of all time. DealRoom. Web.
Nguyen, N. H., & Phan, H. V. (2017). Policy uncertainty and Mergers & Acquisitions. Journal of Financial and Quantitative Analysis, 52(2), 613–644.
Patel, K. (2021). The 8 biggest M&A failures of all time. DealRoom. Web.
Rebner, S., & Yeganeh, B. (2019). Mindful mergers and acquisitions. Organization Development Review, 51(1), 11-16.
Renneboog, L., & Vansteenkiste, C. (2019). Failure and success in Mergers & Acquisitions. Journal of Corporate Finance, 58, 650-699