Avoiding M&A Failure: Q&A with Leading Finance Professors

Baruch Lev, an expert in accounting and finance from New York University, and Feng Gu, a professor in accounting and law from the State University of New York at Buffalo, recently teamed up to write a book called “The M&A Failure Trap: Why So Many Mergers and Acquisitions Fail, and How the Few Succeed” (Wiley). In their book, they uncover some intriguing trends surrounding mergers and acquisitions (M&A) and share insights that can benefit potential acquirers.

One of the reasons they were prompted to write this book was due to the increase in goodwill write-offs in acquisitions over the past few years. Goodwill write-offs suggest a failure in the acquisition, and Lev and Gu noticed a troubling upward trend in these write-offs. They also observed a surge in conglomerate mergers and a corresponding spike in stock prices, which often leads to increased merger activities.

To study the success and failure of acquisitions, Lev and Gu analyzed a sample of over 40,000 acquisitions spanning 40 years. They discovered that the failure rate of acquisitions is around 70% to 75%, where acquisitions fail to add value to the company. Interestingly, they found that overconfident CEOs, who make multiple acquisitions, tend to have a high failure rate. Another key finding was that CEOs are often incentivized to conduct acquisitions through hefty bonuses, regardless of the success of the acquisition.

Gu emphasized the importance of the human element in M&A, noting that as soon as an acquisition is announced, employees from the target company start leaving. This trend continues after the acquisition, as the merged company looks to cut costs by laying off employees, leading to decreased productivity over time.

Lev highlighted the need for transparent communication to retain talent during and after an acquisition. Providing a realistic integration plan and job opportunities for target employees can help prevent loss of talent and improve overall employee morale.

In conclusion, Lev and Gu’s research sheds light on why so many M&A deals fail and what companies can do to avoid the common pitfalls associated with acquisitions. Their insights offer valuable lessons for potential acquirers looking to navigate the complex world of mergers and acquisitions successfully.