Recently, someone started a discussion about marriage that prompted a discussion on mergers. Below is a quick posting made by your host, Bryan Babcock, about mergers as compared with marriage. There's no particular show with this blog posting. We at The Fine Print just thought you'd like to read and weigh in on an interesting legal topic. Enjoy!
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According to a CNN article by Kevin Voigt, “mergers fail more often than marriages.”1 Indeed, evidence suggests that most mergers fail to increase shareholder value. Whether it is merely a lower shareholder value, or a reorganization and/or divestiture of the merged assets, not long after the merger takes place it falls apart. A 2004 study by Bain & Company found that 70 percent of mergers failed to increase shareholder value.2 In looking at merger failure, one should think in terms of marital failure to discover the reasons why it fails. Mergers typically happen because companies are seeking to improve financial performance, and look to join with other companies to achieve this end. Whether the rationale is related to economies of scale or scope, or taxation benefits, or even as simplistic as increasing revenue or market share, mergers are about two individual companies seeking to unify into one more powerful and efficient entity than the two separately. The catch, like any marriage, is that companies fail to choose the right partner for their vision of the merger. Moreover, the individuality of each entity is sought to be maintained in the new unified firm. The personalities of each entity struggle to survive in the new union, and this causes conflict. Like a marriage, the two individual entities are more concerned with what I want than what we need.
When one looks at marriages, are mergers any different? A marriage is a legal contract between two parties that establishes rights and obligations between the parties. Both marriages and mergers are formations of a unified structure: a family in the case of a marriage and a new entity in the case of a merger. Both come with the same intentions in mind; and their road to destruction stems from the same pitfalls. So why do companies get merged? If most mergers fail, shouldn’t we have fewer? “I guess … [they] are afraid it would mean something if [they] didn’t.”3 With the goal of business being profit (capitalism), mergers appear to serve the function of aiding in wealth accumulation by eliminating the costs of operating two separate entities and creating a heftier power base in the market. However, mergers face a new world of antirust backlash where the proposed power base increase may not come to fruition once the merger takes place.4 The legality of a combination of two entities is a different question from whether, post-merger, the new single entity abuses its own market power and should thus be stopped.
It seems that with so many merger failures neither entity took the time to fully understand what the merger would mean. Nor did the entities fully analyze whether the costs of the merger process, and the post-merger operations of the new entity, would in fact outweigh the benefits of leaving behind the individual identities for the new synergistic firm. “You know the funny part? We were perfectly happy before we decided to live happily ever after.”5 I guess the joke’s on the merging companies.
Footnotes:
1. Kevin Voigt, Mergers Fail More Often Than Marriages, http://edition.cnn.com/2009/BUSINESS/05/21/merger.marriage/ (last updated May 22, 2009).
2. Id.
3. Mr. Big, Sex and the City: The Movie (New Line Cinema 2008) (motion picture).
4. Jarod M. Bona and Paolo Morante, Obama Administration evolves US merger policy, http://www.dlapiper.com/obama-administration-evolves-us-merger-policy/ (last updated Jun. 16, 2009).
5. Carrie Bradshaw, Sex and the City: The Movie (New Line Cinema 2008) (motion picture).
