Finance

One should know that M&A as a strategy for rapid growth can be risky and uncertain. Shareholders of acquired firms are likely to earn above-average returns, while shareholders of acquiring firms’ shares fall as soon as an intention to acquire is announced. This is indicative that investors do not see M&A as a vehicle for achieving any added value to the acquiring firm.

Over the years we have experienced the failure of major M&A. Some manages are rather concerned with empire-building strategies rather than maximising shareholder value; the bigger the firm, the bigger the bonus and salary.

AOL Time Warner is an example of a US multimedia giant created in 2000 by the merger of AOL and Time Warner, new and old media industries. The merger was intended to exploit cross-promotional opportunities following the decline of AOL after the dot.com crash. However, the marriage failed to produce any intended synergy.

Some of the reasons link with M&A failures:

1. Integration difficulties

When two large organisations try to integrate their activities, this can be time-consuming and difficult- The existing organisational culture within each firm is a major barrier to merger. Companies really never integrate their activities some decades later.

However, some organisations like Cisco have managed to achieve effective post-merger integration. Cisco, an American company has developed strong capabilities in this area. The firm always allocate substantial resources to its M&A activities and make great effort in integrating financial, technical and human resources.

2. Inadequate evaluation of Target Company

Acquiring firms do not take sufficient time to evaluating the target company. Lack of a strong due diligence has been cited as the reason of the poor choice of take-over target.

3. Large or extraordinary debt

The revenue-generating activity of the acquired company can be over-estimated, pushing the acquiring firm to take on too much debt to pay for it. In the end,...