Mergers gone wrong

‘Failures’ are financial and cultural

When the merger of hospitals owned by Stanford University and the University of California at San Francisco dissolved in 2000, it was to the tune of hundreds of millions of dollars and a lot of misery. Such failures are very rare say merger and acquisitions insiders.

“Once they’re together, they’re pretty much together permanently and there’s very rarely an unwind provision,” said Bill Baker, lead partner in the healthcare transaction services practice of advisory services firm, KPMG.

It’s difficult to categorize bad mergers as “failed,” Baker added. Unlike Stanford and UCSF, most merged institutions don’t unravel their relationship, so their “failure” doesn’t take on the dramatic step of dissolution.

A failed merger, said Casey Jones, CFA, principal, Fifth Third Securities Capital Strategies Group, is one that

- Fails to generate the level of revenue growth, cost savings or improvement in competitive positioning that was expected which in turn reduces value and investor returns.

- Fails to take advantage of best practices within each organization.

- Does not align incentives appropriately and winds up creating a more stagnant and less competitive organization.

- Creates animosity among the constituent parties, which may increase turnover or reduce productivity. 

“The vast majority of mergers don’t achieve their own self-imposed goals,” said Baker. “They don’t capture (those goals) typically for a variety of reasons. One, their diligence wasn’t sufficient enough to really validate those synergies before they ever did the deal. …. (and the) other issues are typically, from an integration standpoint, people don’t move aggressively enough and they also, quite frankly, just don’t execute well on their own integration plans to achieve those synergies.”

Avoiding a bad merger from the outset is paramount. Undoing a merger is, at the very least, messy, and in some cases, may not be possible, so, it’s incredibly important that those considering merging be diligent, said M&A experts.

“Companies can help avoid bad transactions by having a disciplined process in place to (1) screen for targets, (2) negotiate and structure a deal with a focus on deliberate analysis of a target’s information, and (3) integrate the new company swiftly and efficiently,” said Jones. 

“Where parties are going to be in business together, I recommend that the parties engage in very candid discussion with one another about their expectations,” said G. Scott Rayson, partner at Nashville, Tenn.-based law office Waller Lansden Dortch & Davis. “If it’s a bad fit, don’t pursue it. Most divorces are ugly and expensive, and no one wants to buy a lawsuit.”

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