Monday, March 4, 2002

Why do most mergers fail,

Why do most mergers fail, but some succeed? A recent report in The McKinsey Quarterly suggests that some organizations are able to make mergers and/or acquisitions a part of their long-term growth strategy. (This is a follow-up to a McKinsey study from last fall dissecting why most mergers fail. I wrote about that report in Peer to Peer magazine last November.)

McKinsey chart on market capitalization and acquisition activity

Some interesting revelations from this study: just 2% of companies in the software sector accounted for 63% of the appreciation in market capitalization since 1989. Those same “gold standard” companies do twice as many deals as their competitors, and form “up to 10 times as many alliances” as their competitors. To make the acquisitions strategic, McKinsey argues that the companies focus on smaller deals (relatively speaking) and try to identify mature, noncore businesses to divest to free up capital to acquire companies with larger upside.

This study focuses on the high tech markets. I don’t have the data in front of me, but I sure would be interested in turning this analysis to the professional services world: in the consolidation frenzy among law firms (and their accounting brethren), how many are focusing on acquisitions as opposed to mergers? McKinsey makes a compelling case that mergers (where the acquired company represents more than 50% of the acquiring company’s capitalization) are laden with opportunities for failure (larger integration costs, for starters) – so why aren’t more services firms focused on acquisitions?

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