MERGERS AND ACQUISITIONS: WHY THEY FAIL March 27, 2023|Kingford Kalobi| FCCA|FZiCA|

In order to achieve sustainable growth and survive competition, businesses employ a variety of strategic growth options. These range from investment into markets, divestment, discontinuing of a product line, withdrawal from a certain market, merging or acquiring others or enter into strategic alliances. The basic idea is staying active in the market and gain reasonable share of the market share.

In this paper we focus our attention on the strategic option of mergers and acquisitions and why most of them fail to achieve the anticipated business synergies. Mergers and acquisitions bring together two separate entities through complete changes in ownership. Throughout this discussion we will abbreviate terms mergers and acquisitions to simply M &As.?M & A deals have been taking place from time immemorial. They cut across different industries and sectors. More often they occur in waves. To a greater extent, they are influenced by external events such as economic booms or recessions. So far, they have been five merger waves; the railroad wave of 1895 to 1905; the automobile wave of 1918 to 1930; the conglomerate wave of 1955 to 1970; the mega-merger wave of 1980 to 1990; the present globalization wave of 1994 to date. The recent announcement by IBM on 28 October 2018 to acquire Red Hat in deal valued at $34 Billion and others raises speculation of a potential sixth merger wave, though it is too early to tell.

WHY MERGERS AND ACQUISITIONS FAIL

Most M&As fail due to a host of reasons. We may not cover all of them here but we will attempt to explore the two major ones:

Premium price paid

Negotiating the right price for an acquisition target is absolutely crucial. Offer the target too little, and the bid will be unsuccessful. The price paid in any M&A deal has a significant impact on the success or failure of such a deal. Two thirds of M&As deals in which the price paid for was above the premium price have failed to achieve a profit net of the original acquisition price. For example, in 1980, Imperial Group paid $630 million for Howard Johnson in record fee then. This price was double the market price in that year. In the end this merger failed to recover the purchase premium. The result was a winners’ curse; a situation in which the acquirer pays so much that the original cost may never be recovered. The Royal Bank of Scotland learnt the hard way when they competed fiercely with Barclays Bank to acquire the Dutch Bank ABN AMRO: while The Royal Bank won, the extravagant price paid in excess of € 70bn soon drove The Royal Bank into financial malaise and the government was forced to take ownership of the bank to protect it from total collapse.

Poor cultural integration

While M&As bring together two different entities together for the very first time, these entities have previously been operating differently. In consequence they have different cultures and way of running business. Different working cultures have a huge impact on the success of the business combination. Cultural differences emanate from the fact that companies develop and operate under different cultures which are influenced by national boundaries. Company work culture, systems, and company composition differ from one country to the other. For example, Germans place much emphasis on tasks, Italians derive authority from their job title, and Scandinavians appreciate relationships at places of work much more.

To overcome these cultural differences, it is critical for merging organization to have a rich appreciation of the underlying drivers of such differences and developing a master plan of dealing with the issues therein. One of the ways that this could be achieved is to have team leaders from both camps that understand both cultures and have some reasonable experience of what could work on both fronts. When not well handled the business, combination fails to achieve the anticipated objectives. For example, the acquisition of Chrysler by Daimler Benz proved to be a costly failure due to cultural integration issues. Bringing together top management teams of two separate entities is not an easy undertaking. It is quite complicated and requires a great deal of high level skills of people management and to some extent some patience.

From our discussion we have established that M&As failure occurs when key strategic issues are not given the required attention. In the end this failure all comes down to lack of organizational and strategic fit. Successful M&As such as Facebook acquisition of Instagram or Disney acquisition of Pixar demonstrate that it is important to carry out a robust system of ensuring that the right price is paid for the target company, integration issues are adequately dealt with, effective due diligence is undertaken.

?Most M&As start out as best deals only to fall apart midway into the deal. Such failed corporate marriages have proved to be costly. It is therefore, important for the management team of the acquiring company to put in place strategies that guarantee future business success. On the Zambian front, we do hope that the acquisition of Finance Bank and BANC ABC by Atlas Mara will be a success and achieve the anticipated business synergies. And while this deal looks promising on face value, only time will tell.?

This article was first published in 2019, in the ZICA Accountants Journal

About the Author

Kingford Kalobi is a quantum and purpose driven Finance leader; Policy, Business and Financial Advisor. An award winning Chartered Accountant, seasoned and forward-thinking Finance professional with work/industry experience spanning over 15 years in Accounting, Business and Finance. A Fellow of both the Association of Certified Chartered Accountants (ACCA-UK) and Zambia Institute of Chartered Accountants (ZICA), holds an ACCA Advanced Diploma In Accounting and Business(UK). Kingford also holds a Master of Science in Professional Accountancy from the University of London (UoL-UK). He is the current ZCAS Alumni Association President.

Kingford is a published contemporary author and Researcher on Financial and Management Accounting; Financial Markets; Business and International Finance; Climate Change and Financing for Climate Change; Finance For Water, Sanitation & Hygiene (WASH), Artificial Intelligence; Business and Finance Columnist for the Association of Certified Chartered Accountants (ACCA) - E- Magazine and writes for the Zambia Institute of Chartered Accountants (ZICA) Journal; The Zambia Daily Mail Newspaper’. He also Contributes Trade Insights, Financial, Policy and Business news for Radio Phoenix FM, Money FM Radio, Flava FM Radio, Sun FM Radio ,Q FM Radio, Millennium Radio, Diamond TV and other media institutions.

His famous article publications include: "Mergers and Acquisitions -Why They Fail” ZICA Accountants Journal, 2019; "Audit Evidence" ACCA Zambia E-Magazine, Q1-2020; "The Agile Future Ready Accountant" ACCA Zambia E-Magazine, Q2-2020; "National Airline- The Zambian Perspective," The Zambia Daily, 2018; “The Fourth Industrial Revolution –The Accountants Perspective” ACCA Zambia E-Magazine, Q3-2020; “Social & Economic Recovery- Post Covid-19 Era” ACCA Zambia E-Magazine, Q4-2020