The world of mergers and acquisitions (M&A) is expansive. Globally, companies undertake M&A transactions to enhance performance, create risk diversification, increase profitability,[1] increase shareholder value and drive efficiencies, amongst other reasons. Although global M&A deal values fluctuate annually, M&A remains a viable strategy for companies and leaders to achieve their strategic goals. Through M&A, companies can drive growth and economic profit, avoiding stagnation and the erosion of market share. Notable mergers, such as SmithKline Beecham with Glaxo Wellcome and Exxon Corporation with Mobil Corporation, as well as acquisitions like Facebook’s[2] purchase of WhatsApp, illustrate that M&A can create enduring entities that consistently deliver products and services to consumers.
However, not all M&A transactions are successful. The takeover of AOL by Time Warner, a deal valued at $350 billion remains a cautionary tale for business leaders. Studies have put the failure rate of mergers and acquisitions somewhere between 70% and 90%[3] showing that it is not enough for the companies involved to want the deal to succeed – there is far more at stake when it comes to M&A deals. Mergers and acquisitions present opportunities for executing national and global strategies or entering new markets and sectors. However, these deals must be critically assessed, with important questions asked and answered.
“The day of the announcement was bittersweet… it was an exciting time in bringing together the leading Internet company and the leading media company to create a new company that really had the potential to lead in this new century”.[4]
Stephen M. Case, (former Chief Executive and Chairman, AOL) on the AOL-Time Warner Merger
- What is the ‘why’?
Entities involved in a merger or acquisition must first ask why they are pursuing the transaction—what is the ‘why’ behind the deal? Why are Companies A and B merging, or why is Company A acquiring Company B? Answering and maintaining focus on the ‘why’ guides the entities through the deal and during the critical integration phase that follows. For example, if a company acquires another for its technology and talent, it should not, once the transaction is completed, unnecessarily sideline or dismiss the talent, as doing so would undermine the very purpose of the acquisition.
The DaimlerChrysler merger was initially characterised as a “merger of equals,” with the primary goals to establish economies of scale, capitalise on complementary strengths and strengthen the company’s position in the global market.[5] The plan was for both entities to develop synergies to achieve these objectives. However, what began as a merger of equals quickly came to resemble a takeover, with Daimler assuming dominance. The anticipated synergies never materialised as ‘Daimler was reluctant to trust the factory line and quality
control systems used by Chrysler’,[6] amongst other factors. By 2007, Daimler had sold 80% of its stock in Chrysler to Cerberus Capital Management.
In the DaimlerChrysler merger, the merging entities lost sight of their ‘why’ leading to failure.[7] When a transaction’s original purpose is forgotten, management decisions that impede growth often follow, leading the market and shareholders to question the rationale behind the deal. Such misalignment can result in significant losses, including diminished market share, erosion of consumer and shareholder confidence, and the loss of key personnel. In any M&A transaction, it is essential to identify the strategic objectives of the deal and ensure they align with the long-term goals and imperatives of the entities involved.
- What does the due diligence say?
It is not uncommon for parties involved in an M&A transaction to announce the deal before conducting due diligence, or even skip the process entirely. However, due diligence is crucial to any M&A deal. When conducted properly, it allows the acquiring entity to thoroughly assess the target and weigh the findings against the ‘why’ of the transaction. Insufficient, rushed, or poorly executed due diligence can result in significant legal, financial, and reputational risks. A prime example is Safeway’s acquisition of Dominick’s in 1998. The deal’s rapid timeline left insufficient time for Safeway to conduct comprehensive due diligence, leading to the realisation—after the deal had closed—that Dominick’s focus on prepared foods ran counter to Safeway’s focus on cost discipline and it had strong unions which resisted Safeway’s cost-cutting plans.[8] These misalignments became evident only after the acquisition.
Even when thorough due diligence is performed, failing to act on the findings can still lead to financial and legal risks. Successful business leaders and companies pay close attention to what the due diligence reveals. They probe and ‘take a highly disciplined and objective approach to the process.’[9] In fact, they are often prepared to walk away if the due diligence uncovers serious flaws or risks. On the other hand, weak due diligence—one that fails to target specific areas—can be just as detrimental. Companies must understand the type of due diligence required for each specific deal. For instance, a company merging with a technology firm must conduct technical due diligence to thoroughly assess the technology in question. Additionally, if the target operates in a different sector, the acquirer may need to acquire new expertise for the due diligence process[10] ensuring the target company is effectively assessed.
Legal due diligence is always a critical aspect of any M&A deal. A detailed review of legal and organisational documents can help identify potential legal risks, determine representations and warranties, and clarify key provisions in the transaction documents. It also enables an understanding of existing and future liabilities, as well as necessary consents, waivers, and regulatory consultations. For this reason, it is essential for entities involved in an M&A transaction to engage a law firm with extensive sector knowledge and deep expertise in conducting due diligence. A skilled legal team not only identifies risks but also provides guidance on how to mitigate or avoid them, ensuring a strategic course is mapped out for the transaction.
“I lost 80 percent of my worth and subsequently lost my job. We looked it up to see if I was the biggest loser of all time because I lost about $8 billion. But I don’t think I was the biggest loser of all time. I think at one point Microsoft stock went down more than that for Bill Gates. I think he’s the biggest winner and the biggest loser. I was in the top three or four of all time.”[11]
Ted Turner, (American Entrepreneur and Television Producer) on the AOL-Time Warner merger where he was the largest individual shareholder in the combined company.[12]
- How will cultural integration be achieved?
A critical element in any M&A deal is determining how cultural integration will be achieved. The reality is that no two entities will have identical cultures, and while they may appear to have similar values on the surface, these must be thoroughly examined to assess compatibility and ensure successful integration. In M&A deals, the health of the culture of the merging entities or acquiree should be evaluated. A healthy culture has been defined as one that ‘demonstrates strong talent management, external communications and internal operations.’[13]
After assessing an entity’s culture and probing its health, the next questions are: how will cultural integration be achieved, and how will synergies be developed? Cultural integration is a top-down process, beginning with senior management and cascading through the organisation. The stance taken by senior leadership will dictate how employees respond to the finalised transaction and efforts at cultural integration. In a merger, both entities must recognise that failing to integrate cultures successfully can lead to the deal’s failure. In acquisitions, employees from the target company must understand that failure to integrate into the acquirer’s culture may result in dismissal. The failed AOL-Time Warner and DaimlerChrysler deals serve as reminders of how crucial culture is in any M&A transaction, and how the inability to integrate cultures can have detrimental effects on both the deal and the entities involved.
“There was a lot of optimism…but one of the things that tempered that was that it quickly became obvious that these were very different cultures, very different attitudes about how work was accomplished and the thought process that goes into it.”[14]
Steve Harris (former Vice President of Communications, Chrysler) on the DaimlerChrysler merger.
Conclusion
Mergers & Acquisitions remain central to the growth strategy of companies, enabling firms achieve economies of scale, expand regionally and internationally, and gain access to valuable expertise, among other benefits. Companies that execute successful M&A deals can outpace their competition and capture significant market share. However, numerous cautionary examples over the years illustrate how easily M&A deals can go off course, with the initial excitement fading once the deal is finalised and real-world challenges emerge. To avoid this, companies must not only ask the right questions but also provide well-considered, informed answers. The three key questions outlined are vital, but they are just the starting point.
To explore additional critical questions to address in M&A deals, email insights@xentialp.com.
[1] M. S. Hossain, Merger & Acquisitions (M&As) as an Important Strategic Vehicle in Business: Thematic Areas, Research Avenues & Possible Suggestions, 116 Journal of Economics and Business, vol. 116, (2021).
[2] now Meta.
[3] Clayton M. Christensen, Richard Alton, Curtis Rising, and Andrew Waldeck, The Big Idea: The New M&A Playbook, Harvard Business Review, (March 2011).
[4] Tim Arango, How the AOL-Time Warner Merger Went So Wrong, New York Times, (Jan. 2010).
[5] Nima Noghrehkar, Hindsight or Foresight: Reassessing the DaimlerChrysler Deal as Merger of Equals or Acquisition, Institute for Mergers, Acquisitions & Alliances, (Oct. 2023).
[6] Graeme Weaden, From $35bn to $7.4bn in Nine Years, The Guardian, (May 2007).
[7] Another reason attributed to the failed merger was the culture clash between the two entities.
[8] Geoffrey Cullinan, Jean-Marc Le Roux, and Rolf-Magnus Weddigen, When to Walk Away from a Deal, Harvard Business Review, (Apr. 2004).
[9] Geoffrey Cullinan, Jean-Marc Le Roux, and Rolf-Magnus Weddigen, When to Walk Away from a Deal, Harvard Business Review, (Apr. 2004).
[10] Top M&A Trends in 2024, McKinsey & Company, (2024).
[11] Tim Arango, How the AOL-Time Warner Merger Went So Wrong, New York Times, (Jan. 2010).
[12] Tim Arango, How the AOL-Time Warner Merger Went So Wrong, New York Times, (Jan. 2010).
[13] Paul Daume, Tobias Lundberg, Anika Montag, and Jeff Rudnicki, The flip side of large M&A deals, McKinsey & Company, (March 2022).
[14] Richard Johnson and Larry P. Vellequette, The Culture Clash heard ‘round the world, Automotive News.