Page 255 - AFM Integrated Workbook STUDENT S18-J19

Strategic aspects of acquisitions

3.2 Problems: why mergers / acquisitions fail

If an acquisition generates the expected synergy, shareholders in both the acquiring
company and the target should see an increase in wealth.

However, not all mergers and acquisitions are successful.

Reasons why mergers / acquisitions fail

Synergy does not automatically arise. Unless the management of the two entities
can work together effectively, there is a chance that any forecast benefits of the
new arrangement might not be realised.

Premium paid on acquisition by the acquirer was too high. The shareholder value
of the acquirer sometimes reduces as a result of the acquisition.

Opportunity cost of the investment could be too high. The acquirer realises that
the funds tied up in the acquisition could have been better used, to generate
higher returns elsewhere.

Cultural clashes.

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