Every time there's a big deal, we hear the old argument that M&A creates little value for shareholders, and in many cases destroys it. Mega-mergers are agreed, so the conspiracy theory goes, over lunch at the gentlemens club. They only happen so investment bankers can, with a nudge and a wink, rake off huge fees, and so that barely competent managers can plug gaps in promised growth and befuddle investors with merger accounting.
Although there's enough evidence to suggest that in some cases these clichés are close to the truth, you'll be hard pressed to find any bankers or board members prepared to own up to it. Of course, there are always notable exceptions; one example is Jerry Levin, former chief executive of Time Warner, who recently apologised for presiding over what he himself described as "the worst deal of the century", the disastrous $164bn tie-up with internet giant AOL.
But M&A isn't always as destructive as popular opinion would suggest – according to analysis by David Harding of consultancy Bain & Co, around half of deals do in fact create value for the purchaser, although the ratio has been improving lately, from a sickly 30 per cent success rate between 1986 and 2001. That, of course, means more than half of all deals still fail, and in fact just 9 per cent of deals are felt to meet their objectives entirely, according to research from management consulting firm Hay Group.
And deeper analysis of the statistics tells us that most of those successes come where the target is small and easily integrated – the 'bolt-on'. In his book Mastering the Merger, David Harding suggests that companies that do lots of smaller deals generate better returns than those that acquire less frequently. Take Ultra Electronics, for example. The defence electronics group has completed 20 deals in the past five years to take it into new complementary product areas, or add scale and expertise to existing divisions, and never spending more than £70m – which means that most can be funded from free cash flow.
The problems really start when deals get too big, and it's easy to see why. Big businesses are vastly complicated – carrying out proper due diligence of something as big as ABN Amro, for example, would be all but impossible, not that Sir Fred Goodwin appeared to give it much of a go when he made the disastrous decision that RBS would outbid Barclays for the Dutch bank. "Risk and cost increase in proportion to the size of what you are trying to do," says Charles Andrews, chief executive of software firm Celona, which helps today's technologically-dependent businesses integrate their complex IT systems.
In fact, with hostile takeovers the acquirer doesn't even always get to see the target's books. So quite how buyers can be sure they're paying a fair price, or have spotted all of the 'nasties' in the business, seems unfathomable – which is why many mergers erode shareholder value over time. Simply, the price paid is too high for the buyer to generate a sufficient return above the cost of capital – Mr Harding suggests two-thirds of M&A failures are the consequence of overestimated synergies.
More cynical observers put M&A failure down to a much simpler cause: executive machismo. Too much testosterone, they say, encourages unnecessary risk-taking, and means sensible returns targets and valuation limits go out of the window. Others suggest that M&A is the last resort of a manager bereft of ideas about how to turn around an ailing business – in some cases, bosses are too visionary, taking companies too far outside of their comfort zone.
Certainly, human factors can play a huge role in merger failures. Mr Harding's analysis also suggests that the exodus of talent once a deal has been completed is a frequent issue – put simply, the know-how needed to integrate businesses simply isn't there any more.
