Source: Alpha JWC Ventures
Can Two Wrongs Make a Right? The Truth About Mergers & Acquisitions
Mergers and acquisitions seem like a golden ticket to success for many companies, which is why they continue to pursue them despite high failure rates and hidden consequences for consumers and industry competition.
What do you do when you want your company to grow? You buy another one, of course!
Mergers and acquisitions (M&As) are a staple of the business world. Look in the news and you’ll see all sorts of stories about the latest whispers, breakdowns, and confirmations of deals. Some of the most significant and noteworthy mergers and acquisitions in recent memory include Exxon and Mobil, AOL and Time Warner, and Disney and Pixar. One was a massive success, one was a massive failure, and one was a financial achievement that may have come at the cost of brand sustainability.
Consider a more recent M&A example: this past December, the UK’s Competition and Markets Authority approved a merger between the telecommunications companies Vodafone and Three. With this merger comes exciting developments for the UK’s telecommunications market, as Vodafone and Three “have committed to invest £11 billion to create one of Europe’s most advanced 5G networks,” which “will reach 99% of the population and benefit over 50 million customers, though significantly better quality, greater reliability, and enhanced capacity for handling ever-increasing data demand.” At the same time, Iain Morris from LightReading expressed concerns over how overly consolidated this deal will leave the UK’s telecommunications industry. With fewer industry rivals, the UK’s three remaining mobile networks will be less incentivized to improve upon their products to stay ahead of the competition.
Source: CCS Insight
This begs a few questions. Are mergers and acquisitions good for the general public, or death by a thousand consolidations? What motivates companies to merge in the first place? Why do some M&As succeed while others fail? And what role should antitrust regulators play in controlling the M&A gold rush?
In theory, M&As are motivated by one simple concept: synergies. When two companies combine, they have the potential to create synergies by reducing their expenses, increasing revenues, or altering their tax exposure. For instance, a merger between two banks would reduce expenses because they could share an accounting team. Alternatively, the merger of two entertainment companies such as Disney and Pixar could increase revenue through the sharing of IPs, assets, and creative ideas.
What may come as a surprise then, given how straightforward the M&A screening process should be, is that the vast majority of M&As are failures. How much exactly? About 70-90%.
There are many reasons for this phenomenon. For starters, many companies merge for the wrong reasons. Rather than merge or acquire to create synergies, companies will incite an M&A to diversify, inflate their earnings, or purely out of ego.
Diversification seems to make sense as an argument for M&A at first glance. By combining two companies, business-owners are essentially protecting themselves from company-specific risk (Consider: If a taco restaurant merges with a burger restaurant, then the combined restaurant is better able to weather individual shortages of taco shells or burger buns). This is the primary justification for large conglomerate companies like General Electric. However, modern finance theory disapproves of this diversification-justification for M&A. If shareholders want to diversify their investments, they can simply invest in multiple companies and create their own diversified portfolio. Companies attempting to diversify is an inefficient process when individual investors are poised to do so far more effectively on their own. As such, financial markets tend to punish conglomerates with a holding company discount, valuing these conglomerates for less than the cumulative worth of the companies that they hold.
Combining two companies will often inflate their collective earnings, but these increases to revenue are meaningless if expenses rise in tandem or at greater rates.
Finally, many mergers have been spawned out of pure egotism. CEOs are people at the end of the day, and people want to have the biggest toys on the playground. M&As lead to more staff, revenue, and influence for a company, which many CEOs have decided is worth billions of dollars to them. I would argue that Elon Musk’s USD $44B acquisition of the app formerly known as Twitter was one of these ego-driven deals. As Rob Enderle argues in a Forbes article written by Peter Suciu, “‘Musk was upset he’d been banned and used his power to try to force Twitter into making some policy changes including reinstating him, but he overplayed his hand and ended up being forced to pay a huge premium for a company he had no idea how to run.’”
Source: Slate Magazine
Even if synergies do exist and a merger or acquisition is undertaken for the right reasons, they can still fail miserably due to a variety of issues: companies get into bidding wars and overpay for their targets, different company cultures clash, companies don’t understand their partners, workforces don’t integrate properly, and consumers might not enjoy the combined brands, just to name a few.
From a strategic point of view, M&As would be far more successful if companies used systematic tests to evaluate their decision-making. Two common tests to evaluate corporate scope expansion decisions are the “better-off” and “best-alternative” tests. As described in Chapter 6 of Strategy and the Business Landscape by authors Pankaj Ghemawat and Jan Rivkin, the better-off test first evaluates if a company’s decision to expand into a new market will add value and make the company better-off through reduced costs or increases to customer willingness-to-pay. Then, the best-alternative test judges which form of ownership would best allow a company to benefit from their expansion decision. Companies could choose to pursue another business by owning it, or they could instead pursue partnerships, joint ventures, contracts, or licensing agreements, amongst other structures. The ideal form of ownership depends on a variety of factors, such as contractual complexity and property rights. Conducting these tests should help a company identify potential synergies in an M&A opportunity, determine if ownership or partnership is the right path to leverage those synergies, and avoid the common pitfalls that have tanked so many other M&A attempts.
Yet despite all of these concerns surrounding M&As and their significant failure rate, companies just can’t seem to quit. According to Gregory Daco and Mitch Berlin at EY Parthenon, M&A activity is expected to grow by 10% in 2025, and James Langston at Investment Executive reported in October that “[t]he volume of global merger-and-acquisition activity is down this year, but the value of those deals is up.” Perhaps, much like how the stories of Apple and Facebook motivate entrepreneurs amidst high failure rates, M&A success stories such as Microsoft’s acquisition of LinkedIn or Heinz and Kraft’s merger inspire companies to keep trying to capture lightning in a bottle.
James Langston’s comment about M&A volume is particularly interesting, though. While the overall amount of M&A deals declined by 20% in 2024, “so-called mega deals” of USD $10B or more increased by 34%. This discovery troubles me because it indicates a rising trend in companies merging to form oligopolies and monopolies. The aforementioned merger of the UK’s third- and fourth-largest telecommunication companies Vodafone and Three would certainly indicate that oligopoly-building is in full swing across the pond.
In a previous article, I spoke about the dangers of monopolistic companies like Ticketmaster. When companies have too much power in the market, competition is eliminated, and consumers have to accept higher prices and lower quality products as a result. Antitrust regulators are supposed to limit company consolidation but, according to Yale University, modern antitrust enforcement in America is falling short. In their report, they argued that “[t]he evidence overall supports the conclusions that interpretations of U.S. antitrust laws have been too lax towards consolidation and that a significant strengthening of horizontal merger enforcement is needed.”
It’s difficult to come to any significant conclusions regarding mergers and acquisitions because they are not a monolith. Some M&As have been massively successful, and shaped the modern business landscape. Most, however, have been overpriced failures. And others are alarming because of the dangers that they pose to average consumers and the competitive landscape of their respective industries.
My advice to anyone in the field of business (which is really everyone, in a roundabout way) is to exercise vigilance around M&As. They are everywhere, and at some point in your career you will encounter them. Perhaps the company you work at will want to acquire a competitor, or a company that you’re invested in announces a merger, or your favourite taco shop gets bought out by Big Burger Inc. and now the fish taco just isn’t quite the same. Regardless of the circumstances, remember these key takeaways so that you can can make wise, informed decisions about M&As:
Most M&As fail.
The only valid reason to pursue an M&A is to profit from synergies. Diversification, increased earnings, and company growth are not valid arguments for an M&A.
Even if synergies do exist, the right companies need to pursue an M&A because of the challenges involved with combining two organizations, cultures, consumer groups, and workforces.
The “better-off” and “best-alternative” tests can help a company make well-informed corporate scope expansion decisions.
Monopolistic and oligopolistic M&As are supposed to be regulated by antitrust authorities. Key phrase: supposed to.
Notes
Article is written as of Feb 1, 2025, and all figures/info are accurate as of that date
Most of my knowledge and understanding of M&As stems from my past courses at the University of Toronto, including RSM333: Corporate Finance and RSM392: Strategic Management. I have used and referenced those teachings throughout this article.
Photo Sources
Alpha JWC Ventures: https://www.alphajwc.com/en/types-of-company-mergers/
CCS Insight: https://www.ccsinsight.com/blog/vodafone-three-merger-now-its-approved-whats-next/
Slate: https://slate.com/technology/2022/09/elon-musk-twitter-gotta-pick-one.html
2025