Merger mania: but the big deals often come unstuck

Nearly half the mergers of the 1990s are failing to create shareholder value, and with the very largest the odds are 3:1 against, according to research just published by Mercer Management Consulting.

Kenneth Smith, a vice-president of the firm specialising in mergers and acquisitions, says that the deals of this decade are more likely to promote the acquiring company's core strategy than those of the 1980s, but they also involve higher price premiums. And neither the strategic purpose nor the price paid increases the odds of success significantly.

Though common sense equates "better strategy" with "better returns", the data provide no direct link, adds Mr Smith. In fact, he found that the more strategically motivated an acquisition, the higher the premium paid - probably because the competition to acquire is fiercer in industries undergoing restructuring. "The greater the inherent value," he says, "the more aggressive the bidding, and the more an acquirer has to pay."

So if strategy and price do not determine the success of deals, what does? The Mercer findings suggest that how well the merger is managed after contracts have been signed might have something to do with it.

Meanwhile the pace of merger activity shows little sign of slowing down. The value of mergers last year - $659bn - was nearly double that of two years ago and this year's could be higher still, with restructuring still in the early stages in such industries as utilities, transporation and health care.

Moreover, such restructuring is becoming global - as recent huge deals between Ciba Geigy and Sandoz in the pharmaceuticals field and between BT and MCI in the telecommunications area demonstrate. And with such deals increasingly driven by real or perceived product, market and customer-service strategies - as opposed to the "conglomeritis" that fuelled the 1980s M&A boom - their value is likely to go up.

The failure rate is down in the 1990s, to 48 per cent, compared with the 57 per cent rate of the 1980s. But when the target company is not much smaller than the acquirer - at least 30 per cent of its revenues - the failure rate jumps to 75 per cent.

So what improves the odds? Mercer says a compelling deal logic that is well communicated within as well as outside the organisation, close attention to bringing the cultures and other organisational attributes into alignment, and the sheer speed and focus of the transition programme are vital