Mergers and acquisitions are costing companies billions. Here´s how to prevent it
In a business climate marked by escalating global competition and industry disruption, successful mergers and acquisitions are increasingly vital to the growth and profitability of many corporations. Yet research shows most mergers fail – destroying shareholder value and costing companies billions in dollars.
Take the example of Thomas Cook, which collapsed spectacularly this September. Many in the media were quick to point the finger at Brexit. But, digging a little deeper, there's Thomas Cook's 2007 merger with MyTravel, which the Guardian called "a disastrous merger" and the Telegraph said "sowed the seeds of the company's downfall."
Recent numbers paint a bleak picture: In May 2019, 12 years after the merger, Thomas Cook announced it was writing off 1.1 billion pounds after revaluing MyTravel, at the same time it posted a 1.5 billion loss.
So, why do so many companies continue to pursue these value-destroying deals? And how can managers and boards increase their odds of M&A success?
That is the multibillion-dollar question at the heart of IESE Business School professor Nuno Fernandes' latest book The Value Killers: How Mergers and Acquisitions Cost Companies Billions--And How to Prevent It. The book is based on a holistic analysis of successful and unsuccessful transactions, and offers a timely, practical guide for how to avoid the common M&A pitfalls, and instead create value.
The main reason companies are losing billions of dollars through M&As? The fact that most acquisition targets are overvalued, says Fernandes. And this overvaluation arises due to deals' perverse incentives, CEO hubris, and poor preparation, among other things.
[This article has been reproduced with permission from IESE Business School. www.iese.edu/ Views expressed are personal.]