Deals from Hell

15

Conclusions and Implications

THE “WHAT” OF M&A FAILURE: PREVALENCE OF FAILURE AND SUCCESS

Contrary to conventional wisdom M&A is not a loser’s game. A large mass of economic research suggests that investments through acquisition pay about as well as other kinds of corporate investment: On average, they cover the buyer’s cost of capital. This should not be surprising: Competition in markets tends to drive returns toward this cost.

Neither is M&A necessarily a winner’s game. The returns to buyers show a wide dispersion around the average.This dispersion suggests a non-trivial chance that one can lose meaningfully from M&A. But the failure rate in M&A seems no larger than in other business pursuits that are generally applauded, such as new business start-ups, new product introductions, expansions to new markets, and investments in R&D and new technology. I suspect that if the public could see all corporate investing with the kind of clarity with which we evaluate large mergers, we could conclude that M&A tends to be in the range of tolerable risk. Business is risky. One should aim to manage risk better, not eliminate it.

Viewing the dispersion of returns to buyers, my advice to the business practitioner is to be coldly realistic about the benefits of acquisition. Structure your deals very carefully. Particularly avoid overpaying. Have the discipline to walk away from uneconomic deals.Work very hard to achieve the economic gains you hypothesized. Take nothing for granted. M&A ...