How Successful are M&As and Why Do Companies Keep Pursuing Them?

Mergers and acquisitions (M&As) have long been seen as a strategic pathway to accelerated growth, market expansion, and diversification. However, despite their potential for creating significant value, statistics show that the majority of these deals do not deliver the expected results. In fact, estimates suggest that as many as 70% to 90% of M&As fail to achieve their financial or strategic objectives. This raises the question: If M&As are so prone to failure, why do companies continue to pursue them?

This paradox—where failure is prevalent but companies persist in merging or acquiring other businesses—has critical implications for senior executives, bankers, investors, and strategists. In this article, we will explore the key reasons for M&A failures, the motivations driving companies to continue with these deals, and practical steps that can be taken to increase the chances of success.

1. Why Do Mergers and Acquisitions Fail?

While the reasons for M&A failures vary widely depending on the circumstances, certain common themes consistently emerge. These challenges range from overestimating synergies to integration problems and cultural clashes. Let’s take a closer look at the primary reasons for failure.

a) Overestimated Synergies

Synergies—the combined benefits that companies expect to gain from an M&A—are often overestimated. When companies announce a merger or acquisition, they often highlight the expected synergies from operational efficiencies, cost savings, expanded customer bases, or new market entry. However, many of these projected synergies fail to materialize as anticipated, leading to a loss of value.

Example: The AOL-Time Warner merger in 2000 is frequently cited as one of the most high-profile failures in M&A history. Despite combining AOL's leading online service with Time Warner’s vast media content, the anticipated synergies were never realized. Cultural differences between the companies, combined with the rapid decline of AOL's business model and the dot-com bubble burst, caused the merger to fall apart, ultimately leading to massive losses for shareholders.

Global Benchmark: According to McKinsey & Company, only about 23% of mergers achieve the financial results originally projected, with synergies consistently being the most overestimated element.

b) Cultural Clash

A cultural mismatch between the merging companies can be one of the most destructive forces during an M&A. While the financial and strategic reasons for a merger may make sense on paper, if employees, management, and even customers struggle with the new cultural dynamics, the deal is likely to fail. This is often overlooked during the initial due diligence phase.

Example: The Daimler-Benz and Chrysler merger in 1998 is a classic case of cultural incompatibility. The merger, valued at $36 billion, was doomed because of fundamental differences in management style, corporate values, and approaches to operations between the German and American firms. The clash ultimately led to Daimler-Benz selling Chrysler for a fraction of its original value.

Global Benchmark: According to Harvard Business Review, around 30% of M&As fail due to cultural clashes, underscoring how crucial it is to understand cultural compatibility as part of the due diligence process.

c) Integration Challenges

Post-merger integration (PMI) is often a complex and resource-intensive process that can make or break a deal. Integration involves aligning systems, processes, technology, and corporate structures between the two organizations. Failures in PMI can lead to operational disruptions, loss of business continuity, and poor customer experiences. Inadequate planning or execution during integration is a key contributor to M&A failure.

Example: The Microsoft-Nokia acquisition of 2014—valued at $7.2 billion—has been widely criticized as a failed acquisition. While the deal was initially positioned to strengthen Microsoft’s position in the mobile phone market, the integration of Nokia’s mobile business was riddled with operational inefficiencies, misaligned strategies, and an inability to adapt to rapidly changing technological trends. Microsoft struggled to capture the market share it anticipated, and ultimately wrote off billions in losses.

Global Benchmark: A Deloitte report finds that 60% of mergers fail to deliver the expected value due to poor integration, which highlights how crucial it is to manage this phase effectively.

d) Overpayment for the Target Company

Overpayment is another significant contributor to M&A failure. Often, in the heat of the competitive bidding process, acquirers can pay an inflated price for the target company. This might be driven by optimistic projections about growth, synergies, or competitive pressures from other buyers. However, the premium paid rarely justifies the post-merger financial performance.

Example: The Sprint-Nextel merger in 2005, valued at $35 billion, is a prime example of overpayment. Sprint’s desire to build scale in the mobile industry led them to acquire Nextel at a high premium. However, the expected synergies did not materialize, and the acquisition ultimately resulted in significant value destruction for Sprint’s shareholders.

Global Benchmark: Research from Harvard Business School reveals that 60% of M&As are considered “value-destroying” for shareholders due to overpaying for acquisition targets.

2. Why Do Companies Keep Pursuing M&As?

Despite the high failure rate, M&As remain a popular tool for companies looking to grow, diversify, or build competitive advantage. So, why do companies continue to pursue mergers and acquisitions?

a) Strategic Growth and Market Expansion

One of the main reasons companies pursue M&A is to accelerate their growth. By acquiring competitors or companies in complementary markets, firms can quickly gain access to new customers, technologies, or geographies that would otherwise take years to develop organically.

Example: Facebook’s acquisition of Instagram in 2012 for $1 billion is considered one of the best strategic acquisitions in the tech industry. Instagram provided Facebook with instant access to the growing mobile and visual content market, significantly enhancing its user base and advertising revenue streams.

Insight: According to a KPMG survey, 80% of executives view M&A as a critical element of their growth strategy, especially in mature industries where organic growth can be slower.

b) Competitive Advantage and Economies of Scale

Companies often pursue M&A to gain market power and improve efficiency through economies of scale. By merging with or acquiring competitors, firms can consolidate their position in the market, reduce competition, and achieve cost savings. This typically results in stronger bargaining power with suppliers, distributors, and customers.

Example: Anheuser-Busch InBev’s acquisition of SABMiller in 2016 for $105 billion was driven by the desire to create the world’s largest beer company, gaining significant pricing power and reducing competition in key markets. This deal enabled AB InBev to gain a stronghold in emerging markets like Africa and Latin America.

Global Benchmark: A McKinsey & Company report finds that 45% of M&As in the consumer goods sector are driven by the goal of increasing market power and leveraging economies of scale.

c) Diversification and Risk Mitigation

M&As also offer a way to diversify revenue streams and reduce dependency on any single product or market. In highly cyclical industries, companies may pursue acquisitions in other sectors or geographic regions to stabilize earnings and mitigate the risks associated with economic downturns.

Example: General Electric’s (GE) diversification strategy through numerous acquisitions in healthcare, finance, and energy helped stabilize its earnings and reduce reliance on any one industry. This risk diversification strategy helped GE navigate multiple recessions and changing market dynamics.

Insight: According to PwC, about 45% of M&As are driven by the goal of diversification—especially in global markets, where exposure to different regions or sectors can help mitigate risks.

d) Pressure from Activist Investors and Shareholders

In some cases, companies are pressured into pursuing M&As by activist investors or shareholders looking for faster growth. Investors may push for M&A as a way to unlock value or reshape a company’s strategic direction, particularly when the company is perceived as underperforming or stagnating.

Example: Dell’s acquisition of EMC in 2016 for $67 billion was partially driven by activist investors who believed that Dell needed to transform itself into a major player in the enterprise computing space. The deal allowed Dell to expand its portfolio, despite concerns about integration and market fit.

Insight: 66% of M&A deals in the tech sector are driven by activist investors seeking growth, according to Forbes.

3. How Can M&As Be Made More Successful?

Despite the challenges, there are several strategies that companies can adopt to improve the likelihood of a successful M&A.

a) Conduct Comprehensive Due Diligence

Due diligence must go beyond financial metrics to include a deep dive into cultural compatibility, operational integration challenges, and long-term strategic alignment. Conducting thorough due diligence ensures that companies are not only buying an asset but are also making a sound strategic decision.

b) Develop a Clear Integration Strategy

Successful M&As rely on meticulous post-merger integration (PMI) plans. This involves integrating systems, people, and processes in a way that minimizes disruption while capturing synergies. A clear, well-defined integration strategy can reduce uncertainty and guide both companies through the process.

c) Set Realistic Synergy Goals

Companies must set realistic, achievable synergy targets based on detailed analysis rather than overly optimistic projections. This approach ensures that expectations align with actual performance, helping to avoid disappointments post-merger.

d) Foster Strong Leadership and Communication

The leadership team must be actively involved in guiding the combined entity through the complexities of integration. Transparent communication with employees, customers, and investors is vital to ensure smooth transitions and mitigate resistance to change.

Conclusion

While the failure rate for mergers and acquisitions remains high, the appeal of M&A as a strategic growth tool persists. Companies pursue M&As to expand their market presence, gain efficiencies, diversify risks, and create competitive advantages. However, the risks associated with overpayment, integration challenges, and cultural mismatches remain significant. By implementing best practices around due diligence, integration, and setting realistic expectations, companies can significantly increase the probability of success and make M&As a more effective growth strategy.

For bankers, investment bankers, analysts, and senior executives, understanding the complexities of M&A and navigating the challenges effectively is critical in ensuring long-term value creation.