Mergers and takeovers - further evidence that they rarely work out

A report, conducted by the management consultancy Hay Group, has tried to find why mergers so often fail to live up to their hype. Their key finding was that the ‘culture shock’ caused by bringing together two organisations is the biggest reason for failure. In other words, the marriage is between a couple who can’t or won’t get on. Apparently, the UK’s record was among the worst in Europe where the overall failure rate was 91%, as against 97% here.

This news comes at an especially depressing time, coming just as the global mergers and acquisitions boom has ground to a halt since the ‘credit crunch’ triggered by problems in the money markets. Now investors have to ask if the hugely expensive era of ‘merger mania’ will deliver any of the promised benefits. In 2006 alone, deals worth about £966bn were concluded.

The Hay Group report which analysed more than 200 major European mergers and acquisitions found that about 28% of business leaders who had been involved said that the deal had failed to create “significant new value”. The director of the Hay Group is quoted as saying (Deals fail ‘after culture shock’): “Companies should be examining the compatibility and differences between the two firms well before the deal is made public, in order to have a clear plan of action in place right from the start.”

But the survey also found that about 70% of senior management believe that it is too difficult to get information on a firm’s business culture, staff and organisational structures before they make a bid.

It added that after a deal is completed, only 13% of mangers put a high priority on engaging and integrating executives and the workforce as a whole. The report suggested this had a “disastrous impact” on the successful integration of firms with 78% of employees at a company being bought opposing the mergers. Many managers also said that the atmosphere at work after a merger was also unsatisfactory, with 22% of those asked talking of a ‘culture shock’ and 16% describing the situation as “trench warfare”.

The report can hardly come as a surprise. It only serves to reinforce the finding of dozens of reports and studies which have found the same thing over the last few years. Perhaps the surprise is that this knowledge has done little, or nothing, to dampen the merger frenzy.