Why Mergers Fail

Quick Summary: Poor employee communication during early transaction discussions usually results in failure.


Merger failure is quite common. Failure, in this context, is defined as the combined entity not meeting the projected financial performance that was the basis for the merger.  Generally, the failure is caused by a double-edged sword:  Revenue does not increase, and cost reductions do not materialize as expected within the time frame anticipated.  When these factors occur, “corrective action” is often taken that worsens the situation.  The root cause, invariably, is poor employee communications during the early stages of the transaction discussions.

This article is the most important article in this chapter.  Forewarned is forearmed.  The unfortunate reality is that most M/A transitions do not work to the satisfaction of some or all of the involved parties.  Failure is the norm, not the exception.  Failure, however, does not necessarily mean the total collapse of the merged entity.  If usually means that the financial expectations within the expected time period are not met.  On a longer-term basis, failure may also be viewed as the loss of critical talent or long-term market position or potential which may not be apparent shortly after the transaction is completed.  The long-term negative impacts may not be obvious because of the momentum of the involved parties.  Customers, for example, probably will not “abandon ship” immediately upon the completion of the transaction.  Instead, they may begin to investigate alternatives when their timing seems to be appropriate.  Business partners may follow suit. 

As discussed in article, 7.030203,  “M/A Motivation,” the justification for the merger is often based on the notion that “1 + 1 =3” or the combined revenue, for a variety of reasons, will be greater than the separate revenues of the two companies.  A similar “calculation” shows that the combined entity will have lower costs than the separate companies through headcount and expense reductions and economies of scale.  Both factors, when taken together are summarized as increased productivity.  Finally, these benefits are usually assumed to occur shortly after the conclusion of the merger.  A detailed Excel™ model can be developed that shows quantitively how these three factors overwhelmingly support the planned merger.

Unfortunately, none of these three factors, increased revenue, lower costs and timing, materialize in most cases.  The three misses all share one common root cause:  people!  Rarely are the impacts on individuals, both inside and outside the organizations, adequately taken into account when forecasting the merger benefits.  Instead, the focus is only on the “numbers.”  This is especially true if an outside firm such as an investment banker, business broker, or financial analysis team creates the model.  They simply are not close enough to the people who, without a doubt, are the most important asset of every company. 

The seeds of failure are sewn long before the merger is complete and combined financial results are measured.  As discussed in the articles, 7.030302, “The Realities” and 7.030304, “Employee Anxiety,” employee unrest and changes in behavior will occur as soon as the rumor of a potential merger begins to circulate.  It can be assumed that the rumor mill will begin as soon as more than two people are brought into the discussion about a potential merger.  When, not if the rumor begins, productivity across both companies will be impacted negatively.  The rumor mill cannot be prevented; it can only be replaced with facts and answers to the almost limitless number of questions that will arise from anyone that could be impacted.  Time will be spent on speculation, most of which will project negative outcomes.  Quickly, the rumors will be assumed to be facts which will lead to more negative speculation and the downward productivity cycle will continue.

If there is any doubt about the linkage between M/A failure and poor communications, the “5 Whys” model, developed by Sakichi Toyoda, the Founder of the Toyota Motor Company is useful in identifying the root cause.

  1. Why were the financial expectations missed?  There was a drop in expected productivity (lower revenue or costs higher than projected).
  2. Why was there a decrease in productivity? Employees were distracted and became overly cautious.
  3. Why were they distracted and overly cautious?  They had fear of their unknown future.
  4. Why were they afraid of the future?  They were listening to and reacting to rumors which were negative, predicting personal gloom and doom.
  5. Why were they listening to rumors?  There was an absence of definitive and believable information from management about the potential transaction and how it would affect each of them.

A sixth “why” identifies management’s reluctance to fill in the information gaps, allowing rumors to crepe in and grow on their own.

  • Management does not have all the answers to the questions that will be asked, so they decide to wait until they have them.
  • Management is preoccupied with running the business and working on the seemingly endless list of issues to discuss and resolve regarding the merger, so they do not have enough time to focus on communications.
  • Management, on the advice of counsel, is afraid of making any private statements for fear of violating SEC guidelines.
  • Management believes that by not formally acknowledging the transaction, discussions they can avoid any market, customer, or competitive repercussions.

All of the above rationalizations may be true but the consequences of not communicating will almost certainly doom the transaction.  Good judgment must prevail.


There are several quotes/observations that encapsulate the often-ignored people issues that lead to an M/A failure.  Acknowledging them and taking action to mitigate their impacts is crucial to the success of the merger process.

  1. Isaac Newton (17th Century Physicist): “Bodies at rest tend to stay at rest, while bodies in motion tend to stay in motion.”
    • People naturally resist change.
    • It takes longer than planned for people to accept and internalize changes.
  2. Isaac Newton: “For every action, there is an equal and opposite reaction.”
    • It is not what you say, it is what others think they heard that counts.
    • Individuals will listen through their pre-formed biases.
  3. Harry Chapin (Folksong writer/performer): “Empty spaces are made for filling.”
    • If you don’t tell them, the rumor mill will!
    • All of your actions will be scrutinized to see if they match your words.
  4. Tom Berger (Author of this collection): “Beforehand, it is an explanation; after-the-fact, the same words are viewed as an excuse.”
    • Trust is fragile and easily lost.
    • Once lost, trust is hard to re-establish.
  5. Tom Berger: “If you look for the worst, you are seldom disappointed.”
    • The unknown is scary and filled with fears.
    • “More bad things CAN happen than WILL happen.” (not an original quote)

The five quotations and comments listed above all share the common theme:  Open communications, early and often.  Without this simple (but not easy) approach, poor post-merger performance is almost guaranteed.  You can almost take it the bank – which will not have anywhere near the profits that you projected!


Article Number : 7.030206   

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