How to Succeed at M&A When Most Mergers Fail

A study conducted on over 40,000 corporate acquisitions over the last four decades determined that around 70 percent of mergers fail, in that they don't deliver the synergies, revenue boosts and market-capture growth that were promised at the time of acquisition.

The study also found a worsening rate of M&A success over time, meaning that it hasn't gotten any easier and operators have not been more efficient at it over the years. The authors also outlined the steps that HR and other senior executives can take to prevent or mitigate the risk of M&A activity.

The failure rate reported in this study lines up with previous studies, though some report an even higher rate of failure. Study author Baruch Lev said executive overconfidence and pressure to meet growth goals are major drivers of these failed acquisitions.

A professor emeritus of accounting and finance at NYU's Stern School of Business, Lev told Newsweek that while acquisitions sometimes see a stock bump based on optimism for the merger, the stock price two or three years down the road is a better indicator of the success of the action. Most studies also did not track goodwill write-offs when considering the success of an acquisition, he noted.

"We have a combined measure which reflects both earnings growth, the stock market and the absence of goodwill write-offs, [which] is usually the first admittance of managers to the public that the acquisition didn't succeed," he explained.

Lev and co-author Feng Gu, chair and professor of accounting and law at the University of Buffalo School of Management, released a book titled The M&A Failure Trap in November to provide a deeper understanding of their study's findings, including key themes of doomed mergers and commonalities of successful ones.

"Most M&As fail, causing massive losses to shareholders of the acquiring companies, and serious dislocations to employees, customers and suppliers. A widespread, and still growing debacle," they wrote.

Their research found a rise in "conglomerate" acquisitions (those across unrelated industries) over the last 10 to 15 years, even though this kind of acquisition has a higher chance of failure. Outside research suggests M&A activity is expected to rise in 2025.

Overconfident Managers & Public Company Pressures

"You wouldn't know this grim and highly damaging fact [of 70-75 percent M&A failure] if you just followed the uniformly upbeat and enthusiastic merger announcements made by the acquiring and acquired executives," the book's authors wrote, "replete with highly optimistic promises of substantial synergies (cost savings), development of revolutionary products and services, or new markets to be penetrated by the proposed merger partners. Alas, most of those statements are sheer wishful thinking and sometimes hype, designed to garner investors' support for the merger."

Lev and Gu found a number of common traits in failed M&As, such as high compensation incentives for executives to complete an acquisition rather than waiting to ensure the acquisition was valuable. They also found that overconfident executives and pressure to meet growth goals were among the primary reasons that doomed acquisition processes began.

"A host of behavioral studies show that CEOs are overconfident," Lev said. "They grossly exaggerate their ability, particularly to take targets that are not doing well and to turn them over into a success."

Lev also explained where the pressure to acquire can come from.

"When previous success peters off, sales go down, earnings go down, they miss analyst forecasts, executives are under enormous pressure from influential investors, activist investors who want to come in and change things, and the board, to do something big to reverse the situation," he said.

Other factors possessing a high correlation with M&A failure included large acquisition size relative to the acquiring company and making acquisitions because of perceived favorable market conditions, or because other competitors are doing it. Also, when buying, companies pay a premium on the value of the target company, either due to a competitive bidding process or other factors, and they typically end up chasing but never reaching that additional value.

Lev noted that, in the 1960s, conglomerated companies were trending in strategy circles because of economies of scale and the risk mitigation of being in multiple industries, where if one area is struggling due to external factors, the company's risk is spread out across a few different sectors.

"But this can be easily done by shareholders on their own," Lev noted. "They don't have to have two companies merge. They can just buy the shares of the two companies and get the same risk diversification. So there's basically no economic justification, and indeed they failed."

Lev called it "startling" that conglomerated mergers have been rising, and points to the confidence of executives at certain types of companies, noting Microsoft's 2013 acquisition of Nokia as an example. The tech giant paid $7.2 billion to acquire Nokia's devices and services businesses and license its patents and mapping, but wrote off a loss of $7.6 billion in its mobile division less than two years later.

"Some of them are convinced that they can turn over badly run companies," he said.
"[Microsoft] was convinced that they'll be able to turn it over and make great success of it and bring it back to the days of glory. After a couple of years, they sold what remained off with a big loss. If it's a weak company already, the key employees are already leaving, you may be in big trouble."

Alternatives to M&A

The best way to avoid this risk is by not engaging in the acquisition process to begin with. The authors noted that an acquisition is typically the largest investment a company will make, and yet it has such a high failure rate. Some do succeed, but Lev and Gu's research found that changing business models or advancing technology are among the best reasons to proceed.

Alternatively, the authors also outlined additional options including internal research and development—Lev noted Amazon's development of Amazon Web Services as a prominent example—as well as joint ventures, as in the example of the German division of Merck, which Lev said succeeded in advancing its AI capabilities through co-develop partnerships with technology companies rather than acquisition.

A problem that the authors highlighted is that many business leaders are not incentivized to invest heavily in internal development, or may not see those rewards until after they depart. Similarly, joint ventures are typically not as celebrated as acquisitions.

"Managers' compensation is mainly based on the size of the company. Large companies are supposed to be more difficult to manage, hence higher compensation for managers. If you acquire, you increase the size of the company. If you increase the size of the company, your compensation goes up," Lev said. "So there are internal incentives, and in this case, they are really bad incentives for managers to go and acquire companies."

In their research, Lev shared that they found bonuses tied to acquisitions for situations like the above, growth of the company and simply completing an acquisition, rather than completing a successful acquisition and merger.

How to Avoid M&A Traps

In pointing to the common themes of successful M&A, the authors pointed to Google's acquisition of YouTube as one of the greatest acquisition success stories in the tech industry. One of the main reasons for its success, they added, is that the company was allowed to continue to run independently.

"Most people know that the odds are against it," Lev said. "The fact is that when acquisitions are announced, stock prices usually go down…because investors are now wary about acquisitions."

One of the greatest responsibilities for HR in a merger is to work hard with the employees of the acquired company. The talent loss after an acquisition can be so significant that it saps value from the transaction.

"When an acquisition is just announced, before the acquisition itself and the integration of the company, there is a substantial drop in the number of employees," Lev said. "They know that the prospects are usually not good of success, and if it's a failure, they are going to be laid off. They know that they will usually be reassigned, sometimes even dislocated from the place they live. It's usually not a very good prospect."

Lev points to retention bonuses but also thorough communication and care to retain key employees and particularly employees that are critical to meeting the benefits of a combined organization.

"Unless the acquiring company is having special efforts to retain key employees, because those who leave have good alternatives while those that don't have good alternatives stay, there is a significant degradation of the workforce," he said.

In terms of timing, recessions may seem like a good time to buy some public companies at a discount, but the instability of those periods makes the timing not ideal, and acquisitions occurring during a recession have a higher rate of failure than on average, Lev said.

"These are very bad acquisitions in this case, but the two years following the recession…you see people make great acquisitions, because you have an opportunity to see who comes out of the recession relatively unscathed," he said.

The Role of HR and Leadership

Within the company that's made the acquisition, HR and other business leaders need to work hard to "quiet down any threats or fears of the buying company's employees," though they are not as at-risk as those of the target company.

"HR has a very important role, particularly in keeping key target employees in place," he said. "Otherwise they're going to get an empty shell." He also added that HR can play a prominent role in due diligence around culture, process, talent strategy and other key factors.

Ultimately, while M&A has a high failure rate, companies will still try to engage this strategy in pursuit of growth. The individual confidence of CEOs and boards is not likely to change anytime soon, and expectations for 2025 are rising.

For leaders finding themselves facing an M&A discussion, Lev recommends leading with strategy and attempting serious deliberation of alternatives to acquisition before purchasing a whole other company, and performing thorough due diligence before signing the deal.

"First look at the strategy, and then look at how best to achieve the strategy," he said. "If you have enough time, do internal development. If you are really desperate, you may have to do an acquisition. But if you acquire, acquire wisely."