In the midst of these unprecedented times, many companies are looking to mergers and acquisitions to realize new growth opportunities and diversify; however, before heading down this road, one question needs to be asked: is it a marriage built to last or is it doomed from the start? A recent paper, which examined 1,365 M&A deals occurring between 1983 and 2010, found that 46% eventually resulted in divestment or "divorce". Moreover, 77% of these corporate divorces stemmed from M&A failures. The authors identify post-acquisition industry shocks and cultural dissimilarities as the primary causes behind corporate divorce, but suggest that proactive diligence and consideration can combat harmful effects and build strong corporate unions.
Post-Acquisition Industry Shocks
"Industry shocks", or unforeseeable events that disturb industry structures and the economic landscape, were found to have a high correlation with the long-term success of a merger or acquisition, both positively and negatively. Targets who experienced a positive shock to their respective industry were less likely to be divorced, while divestitures were more likely to occur when the target's industry experienced a negative shock. A similar effect is likely to occur as the result of the ongoing COVID-19 pandemic, with companies taking a sharp look at the profitability of their pre-COVID investments. While the pandemic has already led to significant changes in the M&A landscape, it may be years before the effects of this "industry shock" can fully be measured.
Cultural dissimilarities between acquiring and target companies was found to be the greatest driver of corporate divorce. Unions between companies with vastly different values and disparate ages frequently ended in divorce. According to the authors, this pattern reveals executives' failure to adequately consider cultural values and symmetries, such as trust, hierarchy and individualism, before concluding M&A deals. CEOs often address M&A failures stemming from insufficient cultural awareness by quickly undoing unsuccessful deals, with 40% of corporate divorces happening within fours years of a new CEO's term.
The study indicated that a merger wave is followed by corresponding divestiture wave in the following decade, with 10 years being the average time companies retained their acquisitions before divesting. With 2021 set to bring forward massive levels of M&A activity, now is the time to consider lessons from the past and avoid future failure. The pressure to move quickly cannot outweigh careful due diligence and a proper assessment of corporate culture. In order to maintain a strong post-acquisition union, companies should seek out and deal with corporations with cultures that compliment their own and take care to ensure that proper protections are in place to manage long-terms impacts from the COVID-19 acquisition boom.
The author would like to thank Lila Yaacoub, Articling Student, for her significant contribution to this blog post.
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