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Failed mergers often caused by overconfident managers

11 May 2011

A large proportion of the thousands of mergers and acquisitions that take place worldwide every year, fail. This can largely be attributed to management ‘hubris’. Mergers are only likely to succeed if they are in response to changing circumstances, such as new legislation, important innovations or opening up new markets. This is the conclusion of Irish merger specialist Killian McCarthy in his doctorate thesis which he will defend on 16 May 2011 at the Faculty of Economics and Business.

Ten billion US dollars a day were spent on mergers and acquisitions in the last merger wave between 2003 and 2008. Yet 60 to 80 percent of these mergers turned out to be failures in terms of shareholder value. The whole became worth less than the sum of its parts.

Shareholder value

According to Killian McCarthy, shareholders let themselves be too easily persuaded by the management that a particular merger should go ahead, for no other reason than that the money is there for it. ‘It is hubris, a sort of overconfidence, on the part of managers who think that a foreign merger gets you over the border more cheaply than if you do it yourself, for example. Or that it is easier to buy a company with a new product than to develop one yourself.’ That such mergers fail is often because the management can almost never improve the performance of an acquired business in another country or market segment. ‘Managers have different interests at stake in such decisions than their shareholders, who want to maintain as much value as possible’, says McCarthy.

Opportunity

McCarthy investigated 35,000 mergers worldwide in the period  1992-2008, during the fifth and sixth merger waves. He looked at the factors affecting the success of these mergers. ‘If a manager sees a real opportunity – if the legislation suddenly makes something possible, for example – this change in the situation then often justifies an acquisition. Many mergers connected with the fall of the Iron Curtain were successful for this reason. Often though, there are no new circumstances, a manager simply wants growth.’  ‘Big’ mergers in particular can go badly wrong if they are undertaken for the wrong reasons. Smaller mergers are correspondingly less affected, McCarthy found.

Regulation

Although failed mergers cost billions to society, McCarthy is not in favour of stricter regulation. ‘I have no idea what type of regulation the government would have to devise to assess the reasoning of managers intent on a merger. It would be better for shareholders to pay more attention themselves, after all, it is their company.’

Curriculum Vitae

Killian McCarthy (Cork, Ireland, 1981) studied management, law and economics in Cork, Utrecht and Vienna.  His research focuses on mergers and corporate strategy, but he has also published on money laundering, the financing of criminal organizations and media influence on market sentiment. He has been with the University of Groningen since 2008. Killian McCarthy will be awarded a PhD by the Faculty of Economics and Business at the University of Groningen, where he was supervised by Prof. W.A. Dolfsma.

Further information:

Killian McCarthy, tel. 06-50622106 or 050-3636810, or k.j.mccarthy rug.nl

Last modified:13 March 2020 01.52 a.m.
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