Success of Mergers/Acquisitions Varies by Scope, Objectives

MBA (6/6/2008 ) Palaparty, Vijay
Treating all mergers and acquisitions alike increases chance of failure, according to a report from A.T. Kearney, a global management consulting firm. The report says a lack of differentiation results in unsustainable initial growth momentum, causing post-merger financial slowdown.
“Every merger is different,” said Juergen Rothenbuecher , vice president and head of A.T. Kearney’s merger strategy practice in Europe and an author of the report, All Mergers Are Not Alike. “Mergers differ according to size, and most importantly, by their objectives and scope of integration.”

The reported identified seven distinct merger types that drove activity: volume, regional, product, competency, forward, backward and business extensions. Overall, the 175 mergers surveyed in the report revealed mixed performance. Return on sales increased only 0.3 percent on average. Sales growth slowed by 6 percentage points and profit growth decreased by 9.4 percentage points. The report said performance was hampered by illusion of synergies, loss of growth momentum and erosion of healthy profits.

Different merger types illustrated differing performance as well. Volume extensions experienced the most negative effects from synergy—sales growth decreased by 8.35 percentage points and profitability fell by 9.36 percentage. Product extension mergers had the largest reduction in ROS of 2.06 percentage points, stimulating sales growth only 1.13 percentage points.

“Differences in merger performance illustrate the importance of judiciously assessing both the opportunities and risks specific to each merger,” Rothenbuecher said. “Companies can establish their priorities during integration, focusing on the most critical success factors for their merger type rather than reporting to one-size-fits-all merger approaches.”

Of the 175 mergers surveyed, 120 mergers were volume-driven—designed to increase clout and market share, the report said. “Capturing economies of scale and market leadership were among primary motives for achieving external growth across industries," the survey said.

The report also noted regional extensions ranked second in popularity, expected considering rampant globalization. "Pursuing M&A in emerging markets can also be established companies’ strategic response to keep new, rapidly growing competitors at bay,” it said. Regional extension drove 23 mergers of the total survey population.

Another report from A.T. Kearney, The Rise of Emerging Markets in Mergers and Acquisitions, said emerging markets play an increasingly important role in mergers and acquisitions. While the number of majority acquisitions increased globally by 6 percent, acquisitions of established companies by emerging firms grew at an annual rate of 26 percent.

“Beginning in 2002, deals between developing and developed countries grew at an annual rate of 19 percent—far in excess of industry average and four times faster than deals conducted with either developing or developed countries alone,” the report said.

Developing countries such as China, India, Malaysia, Russia, the United Arab Emirates and South Africa were most active in absorbing established firms; India, Malaysia and China alone accounted for 56 percent of deals between 2002 and 2007. Of 2,168 majority acquisitions between developed and developing countries in 2007, nearly 20 percent—421 mergers—were driven by companies from developing countries.

“Although their motives differ from traditional M&A activity, it is clear that in the near term, emerging competitors pose a potential threat to companies in developed countries,” said Joachim von Hoyningen-Huene, manager at A.T. Kearney’s office in Munich, Germany and co-author of the report. “A paradigm shift is occurring and creating unprecedented pressure on companies in the developed world.”