3 Examples Of Failed Mergers and Acquisitions
Mergers and acquisitions can help a company improve its bottom line, reach a wider customer base and accelerate both innovation and business growth. However, sometimes a merger or acquisition doesn’t generate the anticipated outcomes.
When is a merger or acquisition deemed to have failed?
A merger or acquisition is deemed to fail if the newly combined companies dissolve back into their original separate companies, or where there is a significant fall in financial performance.
Examples of failed mergers and acquisitions:
AOL and Time Warner
In 2000 CEO of America Online Inc (AOL) Steve Case made an offer to acquire Time Warner at the peak of its dot.com success. AOL at this time provided dial-up internet and email, with over 30 million subscribers using the services it was the world’s largest internet provider.
After a period of negotiation, an offer by AOL for a 55/45 ownership merger was refused, AOL pursued a hostile takeover, which concluded in 2002 in a stock and debt deal of $182 billion. The new board would have an equal number of AOL and Time Warner directors, with Steve Case as chairman of the board.
Early indications of financial risk despite media excitement
Time Warner, the world’s largest media and publishing company and home to Warner Bros, HBO, CNN, TBS and Time magazine, seemed like an ideal acquisition for the internet giant. Press around the deal was overwhelmingly hyped, predicting future synergy savings of $1 billion alongside future increases in revenue and cash flow.
During regulatory approvals, economists at the Federal Trade Commission (FTC) warned that the deal did not make financial sense. News of the acquisition was not positively received by the Time Warner executive team.
No plan to keep up with rapidly changing technology
High-speed broadband internet access meant AOL’s dial-up online advertising revenue was slowing rapidly. This, alongside regulatory issues and internal cultural friction, would prevent the combined company from capitalising on a new digital era of media and publication.
Inaccurate revenue reporting
Journalist Alex Klien began to investigate AOL, finding that the company was improperly inflating advertising revenue. Publishing his stories in 2002 led to investigations by the SEC and Department of Justice, hefty fines and a restatement of past earnings.
It was clear that AOL was not meeting the financial forecasts underpinning the deal.
Culture misalignment and dissolution
Teams on both sides were unfriendly and failed to work towards solving the challenges of a rapidly changing environment.
By 2002 the merged company reported a $98.7 billion loss, with AOL's stock value falling from $226 billion to just $20 billion. Ted Turner of Time Warner lost around 80% of his wealth in the deal (not the biggest loss in history, at one stage Bill Gates suffered a greater loss at Microsoft). Time Warner spun off AOL in 2009, and in 2018 Time Warner was acquired by AT&T.
Why did the AOL Time Warner deal ultimately fail?
Key reasons for the failure included:
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Lack of cooperation between teams of the merged company
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Lack of foresight to keep pace with rapidly changing technology
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Failure of due diligence processes to surface business risks
eBay and Skype
eBay’s optimistic forecast of how Skype’s technology would improve its two-sided marketplace model led Meg Whitman (eBay CEO and the 31st employee of the ten-year-old dot.com company) to pursue the acquisition of the new video communication technology, closing the deal for a generous $2.6 billion in 2005.
No customer research ahead of an expensive deal
Better customer research before the deal could have prevented this expensive mistake, with eBay users demonstrating a clear preference for email communication to close transactions and conduct auctions.
In this instance, the ‘old’ ways of communicating protected customer values such as anonymity.
Within 24 months eBay wrote down Skype’s value to $900 million, selling in 2011 to Microsoft.
Why did the eBay and Skype deal fail?
eBay’s attempt to stay modern with the purchase of the two-year-old company Skype failed due to a lack of customer research. By better understanding its established audience, Skype could have invested in improving the selling experience in ways that would increase the retention of both customers and sellers.
Key learnings:
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Invest in new technology only if it aligns with customer demands
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Consider customer values when designing a user experience.
It’s worth noting that investing in emerging technologies often pays off, one example is Google’s purchase of Android in 2005, resulting in an estimated 85% market share in smartphones. Knowing your customers and identifying potential synergies in technology is key to successful growth through M&A.
Vodafone and Mannesmann AG
Another example of a hostile takeover and the biggest deal to date, Vodafone acquired Mannesman in a 50.5/49.5 deal for $185 billion in 2000.
Mannesman, an industrial steel conglomerate, had acquired Orange, a French multinational telecommunications company. As it became clear that this deal could not be dissolved, Vodfone moved in to acquire Mannesman.
Vodafone first proposed to buy German telecommunications giant Mannesman in a 42/58 deal in 1999, meeting resistance from management and even later approaching shareholders directly with a tender offer.
Hostile takeover supported by the largest shareholder
In addition to the higher offer Vodafone made it clear that it would spin off non-telcom assets of Mannesman and deprive Orange in order to get regulatory approval.
After increasing the offer several times, in February 2000 the acquisition was announced following support for the deal from Mannesman’s largest shareholder, a Hong Kong-based company Hutchison Whampoa. An initial incomplete notification delayed the regulatory process and the completion of the deal and Vodafone was required to allow third party access to the networks to protect fair competition.
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This marked the first hostile takeover of a large German organisation by a foreign company, with five Mannesman directors joining the Vodafone board. The milestone acquisition opened the door for reduced political interference in mergers and acquisitions across borders.
High emotions cause post-acquisition conflict
The path to a final agreement was fraught, with board and advisors on both sides working amidst conflict to finalise a contract agreement.
The acquisition made Vodafone the world’s largest mobile operator for a time, only overtaken in size by China Mobile’s capture of the Chinese domestic market. However, the combined company failed to meet contractual requirements, creating a significant disparity between pre-acquisition and post-acquisition valuations, dropping to just 37% of its peak value by 2009.
Why did the Vodafone Mannesmann deal fail?
Carrying significant debt from the merger, Vodafone dominated 10 European markets but struggled to embrace the German employees’ ideals. Without an effective strategy to bring the teams under a single umbrella of shared values and goals, Vodafone lost $23.5 billion in one-time expenses.
Vodafone’s more informal approach to operations contrasted with Mannesman’s structured business. Although this deal did not see a subsequent dissolution, the acquisition was deemed a failure due to the poor financial performance and extensive reduction in German telecom employees in the following years.
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Nevertheless, the acquisition made Vodafone a global player in telecommunications.
Key learnings:
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Growth may come at a financial and emotional cost to employees
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Establishing an effective post-integration strategy is key to realising growth
Considering the future beyond the deal is key for a successful M&A integration
Make your next M&A deal a success with structured post-merger integration. Take the initiative to unify teams, align processes and reduce information silos by transferring information from the due diligence process to integration.
With a clear roadmap, the combined team has the tools to thrive and capitalise on new opportunities, avoiding the pitfalls of these failed merger and acquisition examples.
Plan and execute your M&A integration with Ansarada
Frequently asked questions
Why do up to 90% of mergers and acquisitions fail?
Without a carefully mapped integration strategy, cultural differences prevent potential synergy, growth and capitalisation being realised post-integration. This is often more pronounced in hostile takeovers as negative emotions may run high.
How many mergers fail due to cultural differences?
Some sources claim that between 50-75% of post-merger integrations struggle to meet targets due to incompatible organisational culture.
Why did Pfizer and Allergan not merge?
Deal negotiations in 2016 to merge drug companies Pfizer (US) and Allergan (Ireland) halted due to regulatory impositions from the US Department of Treasury, proposing unfavourable rules that would prevent Pfizer lowering its tax rate by shifting headquarters overseas.
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