4 Lessons From Failed Mergers

To coincide with the merger webinar hosted by Callahan & Associates, here are four infamous examples and lessons from failed mergers in the communications and retail industries.

 
 

Mergers are a way of doing business. When done right, they can provide growth and stability; when done wrong, they can cause embarrassment and financial loss. And despite the due diligence companies undertake to prepare, mergers do go wrong.

As opportunities continue to present themselves — 197 credit union mergers have occurred annually as of third quarter 2014 — analyzing what makes a merger fail provides good insight into what makes a bad fit. The following four failed mergers from outside the credit union industry provide ample lessons for cooperatives.

No. 1 — Time Warner Merges With AOL In 2000

The most infamous of failed mergers, in early 2000 the media giants came together in a $186 billion union, still the largest in history. Positively received at the time — Time Warner would leverage AOL’s online presence and AOL would leverage Time Warner’s cable network and content — workplace culture clashed immediately. The aggressive and arrogant AOL employees, as some described them, horrified the more corporate Time Warner people, and mutual disrespect derailed whatever the companies would accomplish together. The dot com bubble burst soon after, and AOL took a goodwill write off of nearly $99 billion in 2002 as its dial-up subscribers and subscription revenue eroded in the face of always-on, speedier broadband. The companies split in 2009.

Lesson 1: Numbers are important, but culture will make or break a merger.

Lesson 2: Failing to adapt business practices to shifting expectations of consumers can sink even established and healthy businesses.

No. 2 — Sprint And Nextel Merge In 2005

A merger of equals, the 2005 merger of Sprint — the third leading provider of mobile phones in the United States — and Nextel — at the time the fifth — was anything but. Both companies retained their respective headquarters, in Kansas and Virginia, and subsequently faced leadership integration hurdles. By 2007, only a few Nextel executives remained. Those who left blamed unbridgeable cultural differences and upset over taking a backseat to Sprint leadership. Network service proved to be an issue as well. The disparate network technologies were difficult to integrate; in turn, the company struggled to provide fast and reliable wireless service. In 2008, Sprint wrote down $29.7 billion of the $36 billion it had paid for Nextel in 2005. Today, Nextel exists as a wholly owned subsidiary of Sprint.

Lesson 1: Before merging, consider how well core and other processing systems will integrate and create a plan to deal with any resulting issues.

Lesson 2: In a merger of equals, it’s wise to communicate the leadership plan, as overlapping roles can create dissension, confusion, or unhappiness.

No. 3 — Quaker Oats Buys Snapple In 1994

In 1994, emboldened by its popular subsidiary, Gatorade, Quaker Oats purchased Snapple for a price of $1.7 billion to diversify its beverage products. At the time, Snapple had revenues of approximately $700 million, so many analysts questioned the acquisition price. Fast forward 27 months: Quaker Oats sold Snapple, now posting revenue of $500 million, to a holding company for just $300 million — for every day it owned Snapple, Quaker Oats lost $1.6 million. Quaker Oats thought it could leverage relationships with supermarkets and other large retailers to sell Snapple, but approximately half of Snapple’s sales came from convenience stores, gas stations, and independent distributors, which required a different distribution strategy from Gatorade. Additionally, Quaker Oats bungled Snapple’s marketing campaign, going off-brand, which led Coca-Cola and Pepsi to launch competing products that evaporated Snapple’s market share.

Lesson: No two companies are exactly alike. Before a merger or acquisition, companies should understand the difference between markets and ask themselves if one can provide further value to the other. If not, the merger is in no one’s best interest.

No. 4 — Daimler-Benz Merges With Chrysler In 1998

Another merger of equals, in 1998 German-based Daimler-Benz and U.S.-based Chrysler Corporation combined their businesses to form DaimlerChrysler. The combined entity would be third in worldwide auto revenues, market capitalization, and earnings, and fifth in units sold. DaimlerChrysler enjoyed early success, but by 2001 significant losses forced the company to cut 26,000 jobs at its ailing Chrysler division. In 2007, Daimler sold Chrysler to private equity firm Cerberus Capital for $6 billion. Discordant company cultures were to blame, as differences in formality, pay and expenses, operating styles, and the dominant German culture led satisfaction levels at Chrysler to plummet. Jokes such as this became common in Chrysler: “How do you pronounce DaimlerChrysler? ‘Daimler…’ the ‘Chrysler’ is silent.”    

Lesson: Culture shock played a lead role in the failure of this merger, but the lesson here extends beyond that. Daimler-Benz sells luxury cars to wealthy buyers; Chrysler is an affordable brand with an entirely different customer base. Unfortunately, the company failed to correctly market to and distribute the Chrysler brand.

Want More Mergers?

Check out Callahan & Associates' February 11 webinar: Mergers And Organizational Design Options For Sustainable Growth.

Click Here

 

 
 

Feb. 11, 2015


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