4 Cases When M&A Strategy Failed for the Acquirer (EBAY, BAC)

What Is an M&A Strategy?

Transforming a small business into a large one, or scaling a business, occurs in one of two ways. Companies can grow their revenues and profits from within by cultivating and growing demand for their products and services, or they can acquire other companies.

Key Takeaways

  • An M&A strategy is one whereby a company seeks to acquire other companies to achieve synergies and scale.
  • An M&A strategy is riskier than an organic growth strategy.
  • Some mergers fail to create synergies and destroy shareholder value.

The first strategy is known as organic growth. It requires patience but pays big dividends when executed successfully. The second strategy, known as a merger or acquisition (M&A) involves more risk.

Understanding an M&A Strategy

An M&A strategy can create synergies when companies with complementary products, services, and missions unite. However, an M&A strategy 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 show how mergers can create problems.

An M&A strategy can create synergies, but it can also create cultural clashes.

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 considering it 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. 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 initially. 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 an M&A strategy to failure.

$2.8 trillion

The value of global M&A deals in 2020, according to the latest data by the Institute for Mergers, Acquisitions, and Alliances.

Volvo and Renault

The attempted merger of Volvo (OTC: VOLVY) and Renault SA (OTC: RNLSY) in 1993 encountered 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 acclimatize to 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.

Article Sources
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  1. eBay. "eBay Inc. Reiterates 'The Truth About Skype.'"

  2. University of Pennsylvania, Wharton. "eBay Calling Skype: Is It a Good Connection?"

  3. Daimler. "Corporate History."

  4. Automotive News. "The Culture Clash Heard 'Round the World.'"

  5. Federal Reserve Bank of St. Louis. "Bank of America Buys Merrill Lynch Creating Unique Financial Services Firm."

  6. U.S. Government Publishing Office. "Bank of America and Merrill Lynch: How Did a Private Deal Turn Into a Federal Bailout?"

  7. Institute for Mergers, Acquisitions, and Alliances (IMAA). "M&A Statistics."

  8. The Christian Science Motor. "Merger Between Automakers Volvo and Renault Collapses."

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