566 Making Key Strategic Decisions
and long-term M&A performance. The short-term is a narrow window, typi-
cally three to five days, around the merger announcement. Long-term studies
examine postmerger performance two to five years after the transaction is
completed.
We can offer three unambiguous conclusions about the short-term finan-
cial impact of M&A transactions:
- Shareholders of the target firms do very well, with average premiumsbe-
tween 30% and 40%. - Returns to bidders have fallen over time as the market for corporate con-
trol becomes more competitive; recent evidence finds bidder returns in-
distinguishable from zero or even slightly negative. - The combined return of the target and the bidder, that is, the measure of
overall value creation, was slightly positive.
However, these results are highly variable depending on the specific samples
and time periods analyzed. The findings on the long-term performance of
mergers and acquisitions are not any more consistent or encouraging. Agrawal
et al. report “shareholders of acquiring firms experience a wealth loss of about
10% over the five years following the merger completion.”^2 Other studies’ con-
clusions range from underperformance to findings of no abnormal postmerger
performance. The strongest conclusions offered by Weston et al. are that, “It is
likely,therefore, that value is created by M&As,” and that, “Some mergers
perform well, others do not.”^3 So much for the brilliance of the academy! This
level of confidence hardly seems to justify the frenetic pace of merger activity
chronicled in Exhibits 17.1 and 17.2.
If the academic literature seems ambivalent about judging the financial
wisdom of M&A decisions, the popular business press shows no such hesitancy.
In a 1995 special report, Business Weekcarefully analyzed 150 recent deals
valued at $500 million or more and reported“about half destroyed shareholder
wealth” and “another third contributed only marginally to it.” The article’s last
paragraph makes it clear that this is not a benign finding and places the blame
squarely on corporate CEOs.
All this indicates that many large-company CEOs are making multibillion-
dollar decisions about the future of their companies, employees, and share-
holders in part by the seat of their pants. When things go wrong, as the
evidence demonstrates that they often do, these decisions create unnecessary
tumult, losses, and heartache. While there clearly is a role for thoughtful and
well-conceived mergers in American business, all too many don’t meet that
description.
Moreover, in merging and acquiring mindlessly and f lamboyantly, deal-
makers may be eroding the nation’s growth prospects and global competitive-
ness. Dollars that are wasted needlessly on mergers that don’t work might
better be spent on research and new-product development. And in view of the
growing number of corporate divorces, it’s clear that the best strategy for most
would-be marriage partners is never to march to the altar at all.^4