A merger is two relatively equal corporations combining to create a single entity and better serve the market. The two companies typically work together as equals, and each has a say in crucial decisions. An acquisition is similar to a merger but involves a large corporation taking over, or acquiring, a smaller corporation. The larger corporation takes over as the sole decision-maker and often cut costs immediately by keeping only the top talent from the previous corporation.
Mergers and Acquisitions: Far from a Sure Thing
Even though mergers and acquisitions (MA) are legitimate ways to grow a corporation, it does not mean they are always good ideas. According to a recent article from the brightest minds of Wharton University in Pennsylvania, “Value Creator or Destroyer? Keys to Profitable Outcomes,” 80% of all MA’s fail. Companies like AOL & Time Warner and Daimler and Chrysler have had their share of MA failure. Even with clear evidence of an 80% fail rate, corporations pursue MA’s anyway.
The Preemptive Strike
Another cause of bad MA decision-making is the competition and paranoia of today’s business world. It is a cutthroat environment and often fabricates an “act first, before acted upon” philosophy. This type of decision is almost always wrong, which is why business professors such as Mr. Goldstein teach students to separate their emotions from their analytical minds when making decisions of this sort.
Perhaps the biggest problem of all is business executives who cannot expand their capacity for financial decisions beyond statistical analysis. When a corporation is considering an MA, the key metric they look at is Net Present Value of Acquisition (NVP). The NVP simply calculates the value of acquiring said MA target. While NVP helps, all financial pundits will tell you that NVP calculations can and do miss opportunities all the time. The only solid approach to making the correct MA decision is combining the hard numbers AND strategy.
This piece was written from content originally published by Wharton School of Business.