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Mergers and Acquisitions Best Practice

Why Mergers Fail and How to Prevent It

by Susan Cartwright

Executive Summary

  • Mergers and acquisitions (M&A) are increasing in frequency, yet at least half fail to meet financial expectations.

  • The United States and the United Kingdom continue to dominate M&A activity. As the number of cross-border deals increases, however, many other national players are entering the field, further highlighting the issue of cultural compatibility.

  • Financial and strategic factors alone are insufficient to explain the high rate of failure; greater account needs to be taken of human factors.

  • The successful management of integrating people and their organizational cultures is the key to achieving desired M&A outcomes.


The incidence of M&A has continued to increase significantly during the last decade, both domestically and internationally. The sectors most affected by M&A activity have been service- and knowledge-based industries such as banking, insurance, pharmaceuticals, and leisure. Although M&A is a popular means of increasing or protecting market share, the strategy does not always deliver what is expected in terms of increased profitability or economies of scale. While the motives for merger can variously be described as practical, psychological, or opportunist, the objective of all related M&A is to achieve synergy, or what is commonly referred to as the 2 + 2 = 5 effect. However, as many organizations learn to their cost, the mere recognition of potential synergy is no guarantee that the combination will actually realize that potential.

Merger Failure Rates

The burning question remains—why do so many mergers fail to live up to stockholder expectations? In the short term, many seemingly successful acquisitions look good, but disappointing productivity levels are often masked by one-time cost savings, asset disposals, or astute tax maneuvers that inflate balance-sheet figures during the first few years.

Merger gains are notoriously difficult to assess. There are problems in selecting appropriate indices to make any assessment, as well as difficulties in deciding on a suitable measurement period. Typically, the criteria selected by analysts are:

  • profit-to-earning ratios;

  • stock-price fluctuations;

  • managerial assessments.

Irrespective of the evaluation method selected, the evidence on M&A performance is consistent in suggesting that a high proportion of M&As are financially unsuccessful. US sources place merger failure rates as high as 80%, with evidence indicating that around half of mergers fail to meet financial expectations. A much-cited McKinsey study presents evidence that most organizations would have received a better return on their investment if they had merely banked their money instead of buying another company. Consequently, many commentators have concluded that the true beneficiaries from M&A activity are those who sell their shares when deals are announced, and the marriage brokers—the bankers, lawyers, and accountants—who arrange, advise, and execute the deals.

Traditional Reasons for Merger Failure

M&A is still regarded by many decision makers as an exclusively rational, financial, and strategic activity, and not as a human collaboration. Financial and strategic considerations, along with price and availability, therefore dominate target selection, overriding the soft issues such as people and cultural fit. Explanations of merger failure or underperformance tend to focus on reexamining the factors that prompted the initial selection decision, for example:

  • payment of an overinflated price for the acquired company;

  • poor strategic fit;

  • failure to achieve potential economies of scale because of financial mismanagement or incompetence;

  • sudden and unpredicted changes in market conditions.

This ground has been well trodden, yet the rate of merger, acquisition, and joint-venture success has improved little. Clearly these factors may contribute to disappointing M&A outcomes, but this conventional wisdom only partly explains what goes wrong in M&A management.

The Forgotten Factor in M&A

The false distinction that has developed between hard and soft merger issues has been extremely unhelpful in extending our understanding of merger failure, as it separates the impact of the merger on the individual from its financial impact on the organization. Successful M&A outcomes are linked closely to the extent to which management is able to integrate members of organizations and their cultures, and sensitively address and minimize individuals’ concerns.

Because they represent sudden and major change, mergers generate considerable uncertainty and feelings of powerlessness. This can lead to reduced morale, job and career dissatisfaction, and employee stress. Rather than increased profitability, mergers have become associated with a range of negative behavioral outcomes such as:

  • acts of sabotage and petty theft;

  • increased staff turnover, with rates as high as 60% reported;

  • increased sickness and absenteeism.

Ironically, this occurs at the very time when organizations need and expect greater employee loyalty, flexibility, cooperation, and productivity.

People Factors Associated with M&A Failure

Studies like the one conducted by the Chartered Management Institute in the UK have identified a variety of people factors associated with unsuccessful M&A. These include:

  • underestimating the difficulties of merging two cultures;

  • underestimating the problem of skills transfer;

  • demotivation of employees;

  • departure of key people;

  • expenditure of too much energy on doing the deal at the expense of postmerger planning;

  • lack of clear responsibilities, leading to postmerger conflicts;

  • too narrow a focus on internal issues to the neglect of the customers and the external environment;

  • insufficient research about the merger partner or acquired organization.

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Further reading


  • Cartwright, Susan, and Cary L. Cooper. Managing Mergers, Acquisitions and Strategic Alliances. 2nd ed. Woburn, MA: Butterworth-Heinemann, 1996.
  • Cooper, Cary L., and Alan Gregory (eds). Advances in Mergers and Acquisitions. Vol. 1. New York: JAI Press, 2000.
  • Faulkner, D., S. Teerikangas and R. J. Joseph (eds). The Oxford Handbook of Mergers and Acquisitions. Oxford: Oxford University Press, 2012.
  • Stahl, Gunter, and Mark E. Mendenhall (eds). Mergers and Acquisitions. Stanford, CA: Stanford University Press, 2005.

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