„Make and Agonize“

Lars Schweizer about the question of how M&A transactions can be successful and why external consultants are often not very helpful

Lars Schweizer has been Professor for Business Administration, especially Strategic Management, at Goethe University Frankfurt since 2007. His research focusses, among other topics, on Mergers & Acquisitions (M&A), strategic alliances and strategic management.


Are there insights about the average success of M&A transactions? 

It depends on how you measure success. Conditional on the method you will find that between 40 and 70 percent of all transactions fail. The wide range is due to the different approaches. Some people evaluate takeovers based on the share prices, whether these have risen or fallen since the announcement of the transaction. However, this is only reliable if you assume efficient capital markets and eliminate short term effects as well as overall economic developments. A further possibility is to analyze key accounting figures such as return on equity or return on investment over a period of time. But as there is considerable leeway in accounting, results based on this approach are not without doubt either.

The best way is to survey the responsible managers in the respective firms. Because the most important aspect for evaluating an M&A transaction is whether it has met its objective: some firms want to achieve synergies and reduce costs, others aim to enter a specific market or to improve in research and development. Whether the individual goals have been achieved or not, can only be found out by a survey in the end. Of course, a correct comparative value, namely how both companies would have developed without the transaction, cannot be received this way either. 

Are there differences depending on the sector or the size of companies?

Small companies are a bit more successful on average because the transaction is less complex. We do not find different success rates according to sectors though. In contrast, distance and culture are important: in general, cross-border transactions cause more problems than those within the same country.

Employees who fear to be taken over by a U.S. company or a Chinese corporation are mostly right, then?

One has to make distinctions. The increasing M&A activities of companies from developing and emerging economies usually encounter a lot of skepticism in the first place. However, after a while, the employees of the company that was taken over are often surprised of how good things are developing. The reason is that this kind of takeover generally aims at entering the market. This means that the deal is not about consolidation and job cuts but more about investment and extension.

What do enterprises need to take into consideration in M&A transactions? Can you learn “how to take over”? 

A large number of empirical studies show that companies which have M&A experience tend to have better prospects of success. But, of course, the question is how such a learning process is being implemented in the company. In a recent publication* we show that, to be successful, it is very important to install an M&A function at a central position within the company and to bundle all knowledge about processes and routines there. It is also crucial that such a central M&A function accompanies the transaction from the very beginning to its end. This is not always the case. Often, one team develops the strategy, another makes the assessment and a third is in charge of the integration. This way, a lot of information is lost in-between and, even worse, the next step is not thought of in advance. For example, at the stage of the evaluation you already need to take into account the problems of integration: can the company in fact realize in practice the synergies that I am counting? As a result, those who understand the M&A transaction as an overall process will be more successful in the long run.

How common is such a specific M&A function?

In the past it was quite rare, but in the meantime it becomes more and more popular. In our survey among firms from German speaking countries in 2009, only about 60 percent had a specific M&A department or a respective team in the strategy department. Of course, it depends on the size of the firm. In a small company that plans a takeover once or twice in its history, a special M&A function does not make much sense. In this case, one should refer to external consultants. 

How successful are transactions that are implemented with consultants?

We have not found significant results in our survey that would suggest that external consultants have a positive influence on the M&A success. The reason is probably that although consultants are experienced in managing such processes, they lack the internal know-how to implement the transaction successfully in the long run. Because, in the end, the crucial part in a transaction is not the strategy or evaluation but the integration. And here, externals can only partly help as they do not know the internal processes and they cannot anticipate potentially arising problems. Also, consultants are usually not present any more during implementation. Therefore, Germans like to say that M&A stands for “Machen und Abhauen” (make and walk away) in the consultants’ language while it stands for “Machen und Ausbaden” (make and agonize) in the companies. This means that internals will evaluate a potential transaction more realistically from the beginning because, firstly, they know about the implementation problems and, secondly, they do not hide them because they cannot leave in the course of the transaction.

Questions by Muriel Büsser

* Trichterborn, A., zu Knyphausen-Aufseß, D., Schweizer, L. (2015): “How to improve acquisition performance: The role of a dedicated M&A function, M&A learning process, and M&A capability”, Strategic Management Journal, DOI: 10.1002/smj.2364.