Business-Minded Legal Solutions

Reasons to merge — and why many mergers fail

Business mergers have about as high a success rate as marriages: somewhere in the neighborhood of 50 percent. For each one that succeeds, one fails. If you’re considering a merger or acquisition, you no doubt want yours to be the one that succeeds. You have your work cut out for you, as you likely already know. Being armed with the knowledge of potential pitfalls will help you decide whether this proposed partnership is a likely candidate for success, and help you navigate the many choices ahead.

Why merge when the rate of success is only 50-50?

Those aren’t great odds, but they’re not bad, especially when there’s much to gain. Common reasons companies give for undertaking mergers and acquisitions are:

  • Growth, which can occur very quickly when a company doubles in size
  • To act first and keep a competitor from going after a company that could help both of you
  • Consolidation, a big money saver when duplicate resources are combined
  • Overall power in the market
  • Tax advantages (although merging with an overseas company to save on U.S. corporate taxes may be an advantage that is going away soon)

If there’s a way to achieve quick growth, increase market share and save money when all is said and done, why wouldn’t you at least make the effort? Well…

What can go wrong in mergers and acquisitions?

There are cautionary tales of famous failed mergers from large companies like Arby’s and Wendy’s (that one lasted three years), and AOL and Time Warner (9 years). While you may not be operating on that scale, you’ll be able to identify with these common causes of failure.

  • The cultures of the two companies do not mesh well: combining two very different entities needs to be handled carefully and may fail because of inherent work culture clashes.
  • The cost savings don’t pan out because the integration of systems and processes doesn’t work as well as envisioned.
  • The acquiring company turns out to have paid too much. For instance, the acquired company’s new, amazing product underperforms, and proves to be worth far less than originally thought.

Another factor to consider is attrition: top employees may feel they need to look elsewhere for work if they’re unsure of their positions in the newly combined enterprise. Talented employees are very costly to replace. Good communication with current employees is vital during the merger.

If you’re planning an acquisition or merger, talk to an experienced business law attorney about these potential pain points and how to avoid them. As in marriage, look (carefully) before you leap.