Merger Hype

handshake There are many reasons why companies merge with each other or acquire a smaller company to become a more important player in the market. Companies trying to expand their customer base usually seem to prosper, but many several analyses done by business gurus, management consultants and investment bankers have shown that in the medium term fewer than half of all mergers actually add value.

Companies dealing with each other can be as complicated as some human relationships. The "bigger-is-better" attitude is surely one of the reasons for the plethora of mergers in recent years in a number of industries, especially in banking, IT, and car industries. Still, beneath there lies a quest for long-term revenues although the future seems more and more unpredictable. Perhaps competitors are teaming up to protect themselves from each other or to gain market share. What are the underlying reasons for companies to seek to merge with others and become bigger? Eero Vaara (below), professor at the Helsinki School of Economics and Business Administrations who lectures on mergers and acquisitions, answered some key questions about this phenomenon of "merger mania".

Why do companies merge?
How come mergers have been so popular recently?

In many industries there seems to be a trend to merge and become more international and competitive through these mergers. The trend began slowly in the 80s and has accelerated at a rapid speed in the 90s. In 1998, there were altogether well over 26,000 deals, which were valued at almost 2.5 trillion dollars, compared with 11,000 deals valued at 0.5 trillion dollars in 1990 (The Economist, 9 Jan 99). The hype continues as the mergers get bigger and bigger.

How do you see this merger trend developing?

A very important question about mergers and acquisitions deals with whether or not the deals add true value to the company. There are usually a lot of expectations that these new companies will gain more market share and so on, but a lot times these expectations are not met in the right scale.

Eero Vaara

Are planned expectations usually met in mergers?
What should merging companies do when the benefits are not realized?

Especially in mergers, as well as in acquiring another company, there are issued that deal with corporate culture and organizational fit between the two sides. There will always be some form of resistance to change and the new situation. To be able to facilitate and bring about the change also on an organizational level, managers need to carefully think through the reasoning for the merger or acquisition. There has to be a crystal clear vision of the logic of the eventual deal well before it actually taking place. It is not enough when executives want some action into the boring everyday business.

What kind of problems can merging companies expect?
With so many problems is merging really worth it?

More on the topic:

Mergers and acquisitions: Consumer point-of-view

Strategic alliances and their risks

© Nettiradio Mikaeli / Isto Felin 2000