Question

Discussion Question 7 If mergers and acquisition quite often end up providing a competitive disadvantage, why do so many of them take place?

Answer 1

Ans) Companies merge for a variety of reasons: expansion of market share, acquisition of new lines of distribution or technology, or reduction of operating costs.The fact that mergers so often fail is not, of itself, a reason for companies to avoid them altogether.

Some of the main risks that may precipitate the failure of an M&A transaction are:

- Integration risk: In many cases, integrating the operations of two companies proves to be a much more difficult task in practice than it seemed in theory. This may result in the combined company being unable to reach the desired targets in terms of cost savings from synergies and economies of scale. A potentially accretive transaction could therefore well turn out to be dilutive.
- Overpayment: If company A is unduly bullish about company B’s prospects – and wants to forestall a possible bid for B from a rival – it may offer a very substantial premium for B. Once it has acquired company B, the best-case scenario that A had anticipated may fail to materialize. For instance, a key drug being developed by B may turn out to have unexpectedly severe side-effects, significantly curtailing its market potential. Company A’s management (and shareholders) may then be left to rue the fact that it paid much more for B than what it was worth. Such overpayment can be a major drag on future financial performance.
- Culture Clash: M&A transactions sometimes fail because the corporate cultures of the potential partners are so dissimilar. Think of a staid technology stalwart acquiring a hot social media start-up and you may get the picture.

• The Disadvantages of Merging Companies
- Clash of Cultures
- Diseconomies of Scale
- Consumer Perceptions
- The Layoffs Dilemma
- Higher Consumer Prices

According to collated research and a recent Harvard Business Review report, the failure rate for mergers and acquisitions (M&A) sits between 70 percent and 90 percent.