Transforming a small business into a big one, or a big business into an even bigger one, essentially occurs one of two ways. Companies can grow their revenues and profits from within by cultivating and growing demand for their products and services. This strategy, known as organic growth, requires patience, but pays big dividends when executed successfully.
A riskier way that companies can grow is through a mergers and acquisitions (M&A) strategy. An M&A strategy can create synergies when companies with complementary products, services and missions unite. However, it can also create tensions and failure when corporate cultures clash, or the acquirer fails to successfully integrate the acquired company's assets, systems and brands. Some corporate unions fail to create synergies and thereby destroy shareholder value. The following four case studies illustrate the varied reasons that mergers can encounter problems.
eBay and Skype
In 2005, eBay Inc. (NASDAQ: EBAY) purchased Skype for $2.6 billion. The purchase price was extremely high considering that Skype had only $7 million in revenues. Meg Whitman, eBay's CEO, justified the acquisition by arguing that Skype would improve the auction site by giving its users a better platform for communicating. Ultimately eBay's users rejected Skype's technology as unnecessary for conducting auctions, and the rationale for the purchase dissipated. Two years after the acquisition, eBay informed its shareholders that it would write down the value of Skype by $900 million. In 2011, eBay was fortunate to find a higher bidder for Skype. It sold Skype to Microsoft and realized a $1.4 billion profit.
While the eBay and Skype merger failed because eBay miscalculated its customers' demand for Skype's product, other M&A deals have failed for completely different reasons.
Daimler-Benz and Chrysler
In 1998, German automotive company Daimler AG (OTC: DDAIY), then known as Daimler-Benz, and American car company Chrysler merged to form a transatlantic auto company. Many observers praised the merger because it combined two companies that focused on different areas of the automotive market and operated in different geographical regions. However, the financial and product synergies for this merger soon paled in comparison to the cultural conflicts the merger created. Chrysler had a loose, entrepreneurial culture, while Daimler-Benz had a very structured and hierarchical approach to business. Analysts noted clashes between the German and American managers at the companies, and ultimately the merger dissolved when Daimler sold its remaining 19.9% stake in Chrysler in 2009.
Bank of America and Merrill Lynch
While Bank of America Corporation (NYSE: BAC) and Merrill Lynch remain as a united entity, the 2008 merger faced serious challenges in the beginning. The two companies took an inordinately long time to integrate their assets and make key executive announcements. Months after the announced merger, the two companies had still not decided which executives would run key groups within the firms, such as investment banking, and which of the two company's management models would prevail. The uncertainty created by this indecision led a lot of Merrill Lynch bankers to leave the company in the months following the merger. Ultimately, these departures destroyed the rationale for the merger. This merger illustrates how a lack of communication of key decisions to stakeholders in the company can lead a M&A strategy to failure.
Volvo and Renault
The attempted merger of Volvo (OTC: VOLVY) and Renault SA (OTC: RNLSY) in 1993 ran into trouble because the two parties failed to address the ownership structure at the outset. Unlike the Daimler and Chrysler merger, this automotive deal lacked executive and cultural clashes. Instead, the two companies began their relationship as joint venture partners, which allowed them to get comfortable with each other. The merger was expected to save the companies $5 billion. However, the two companies failed to consider the problems of combining an investor-owned entity with a government-owned company. The merger would have left Volvo shareholders with a 35% stake in the combined company, while the French government controlled the remainder of the shares. Many analysts believed that shareholders of Volvo and the Swedish people found it unacceptable to sell one of its prized companies to the French government.