A failure to merge.

New book asks why ever more is spent on mergers when so many fail

13 July 2022

The article at a glance

Mergers are constructed by talented executives, lawyers, bankers and advisers, yet most deals fail. A new book The Merger Mystery, co-authored by Geoff Meeks of Cambridge Judge Business School, outlines the reasons why.

Mergers are constructed by talented executives, lawyers, bankers and advisers, yet most deals fail. A new book The Merger Mystery, co-authored by Geoff Meeks of Cambridge Judge Business School, outlines the reasons why.

Cover of the book 'The Merger Mystery', showing a cat with the legs of a chicken.

Mergers of firms have boomed over the past four decades, with a 40-fold increase in deals done each year. These mergers and acquisitions (M&A) are sealed by talented, highly skilled executives, lawyers, bankers and advisers, and spending on mergers totalled $5 trillion in 2021. Yet most mergers fail, and don’t achieve the boost in operating profits they were touted to achieve.

Why? And why hasn’t this been fixed?

Those questions lie at the heart of a new book – The Merger Mystery: Why Spend Ever More on Mergers When So Many Fail? – authored by Geoff Meeks, Emeritus Professor of Financial Accounting at Cambridge Judge Business School, and J. Gay Meeks, Senior Research Associate in the Centre of Development Studies, University of Cambridge. Digital versions are available for free by publishers Open Books Publishers.

M&A takes increasing share of executives’ time and energy

“As evidence of disappointing outcomes mounted, Western businesses were devoting to M&A a large and rapidly increasing share of their key strategic resources: investment funds and senior executives’ time and energy,” the book says.

In a blog posted by the book’s publishers, the Meeks outline a few key factors that have led to the huge gap between the theory and hope surrounding mergers and their actual outcomes:

  • The merger market is plagued by asymmetric information, “sometimes the result of accounting manipulation”.
  • Merger participants have enjoyed “subsidies and privileges” at other people’s expense. This has made some deals attractive to participants despite bringing no operating gains, “while taxpayers, creditors, pensioners, customers and suppliers have lost out.”
  • Incentive structures for key players and advisers induce “perverse, inefficient results” with rewards for CEOs and other top executives of acquiring businesses, in part tied to a correlation between CEO salary and firm size and in part open to “gaming” by participants.
  • The “glamour of life on the acquisition trail” including the media spotlight, boasting rights and the “thrill of the chase”.

Deal incentive structures enrich bosses, not other stakeholders

Examples cited in the book of deal incentive structures that have enriched bosses at the expense of other stakeholders include the $27 billion acquisition of Refinitiv by London Stock Exchange (LSE) in 2021 that tripled the acquirer’s revenue and resulted in a 25% boost in the CEO’s base salary, yet LSE shares fell by a quarter in the same month. In another case, simply closing Vodafone’s $181 billion acquisition of Mannesmann in 2000 triggered a $10 million bonus for Vodafone’s CEO.

“Over time you would expect managers and their advisers to learn from their mistakes, filter out unpromising mergers, and ensure that a large majority of deals result in operating gains,” the book says. “However, this has not happened.”

The book is based on a synthesis of the ideas of economists from Adam Smith to recent Nobel Laureates, with more than 100 statistical studies and evidence from a hundred businesses involved in mergers, mostly in the particularly active US and UK markets, but with data from other countries too.

Reforms urged to reduce number of failed mergers

The book concludes by suggesting reforms by government, regulators, non-executives and others that could significantly reduce the number of failed mergers. These include changes in participants’ contracts that would mitigate conflicts of interest; removing tax, legal, and other distortions which encourage mergers that offer no operating gains; and improving both the appraisal of merger proposals and the monitoring of outcomes.

The authors anticipate criticism of the book from various M&A-related interests as not sufficiently highlighting merger successes.

“But our focus is deliberate,” they say. “The bookstores, company documents and media hagiographies are awash with material on the upside of M&A – the success stories. And some of this material is very good. But analysis of M&A failure is under-represented – not commensurate with its extent and its economic and social damage.” A following sister study, Rising Inequality: The Contribution of Corporate Merger, will address the distributive issues of merger activity.