AFMP4
Syllabus C. Acquisitions And Mergers C1. Acquisitions and mergers versus other growth strategies

C1d. High failure rate of acquisitions 4 / 6

Syllabus C1d)

Compare the various explanations for the high failure rate of acquisitions in enhancing shareholder value.

High failure rate of acquisitions

What is the reason for the failure?

There should be some evidence of synergies in the acquiring firm to produce an acquisition that would enhance shareholder value.

In practice, the shareholders of predator companies seldom enjoy synergistic gains, whereas the shareholders of victim companies benefit from a takeover.

The acquiring company often pays a significant premium over and above the market value of the target company prior to acquisition.

Agency theory

suggests that takeovers are motivated by the self-interest of the acquirer's management.

Poor man-management

can be detrimental to successful integration. 

Lack of communication of goals and future prospects of employees can lead to employees being unclear of what is expected of them.

Window dressing

can be also a reason for the high failure rate.

It is where companies are not acquired because of the synergies that they may create, but in order to present a better financial picture in the short term.