Reasons for Mergers and Acquisitions (M&A) failure in banks
It is very rare for the financial news to analyse the failure potential of mergers at first, it is typically once the deal has been completed and a certain period of time has elapsed, that analysts start the critical analysis. However, there are deals, for example the Allianz and Dresdner Bank merger, where many industry experts expressed serious doubts even before the deal was completed.
The main reasons why some Mergers and Acquisitions (M&A) deals have failed are as follows:
- Time - M&As are typically carried out in a very short period of time and therefore due diligence is difficult to achieve;
- company integration and human resources - it is difficult to join two different companies with usually different corporate cultures and styles. It is especially difficult when it comes to cross-border mergers and this is an issue that many companies choose to ignore. In many cases, banks or insurers are working towards their aim, namely, the expansion through acquisition of the new business, and do not consider the risks of such integration. This integration is even more difficult when it comes to banks merging with insurers, even in the domestic markets. Banks and insurers are essentially completely different types of businesses, they manage different types of risks and their investment strategies vary, therefore a merger can be difficult to achieve. This is why many banks and insurers choose to form joint ventures rather than merge; since they would rather not expose themselves to the risk of acquiring a business that can bring more losses than gains in the future. This is an important issue, since M&A deals usually do not show any gains straight after the deal takes place, and it takes time, even years, for the new company to achieve profitability;
- over-confidence and vanity - this is a very important factor, according to Mr Soudah from MilleniumAssociates (Mr Soudah is the founder of MilleniumAssociates), and it was one of the key issues in the Allianz-Dresdner deal. This factor may take over when the top management may simply wish to become global, or enter a bancassurance deal, without looking at the potential profits, and ignoring the warnings. About 60% of M&A deals are unsuccessful because they approach the deal with overconfidence and instead of taking into account all the facts, they choose to pursue their goal of global expansion. It is important to note that global expansion does not immediately mean profitability and success, since managing global operation means that the company is continuously challenged with new problems when entering new markets and sectors. If for some reason, these problems become too vast, like for example in the case of Egg’s entry in France, the losses can have a devastating impact on the entire company;
- lack of long term view - this is reflected in the fact that many analysts and managers can only look to the short term. Investment managers want to be able to see profits in the same year, not in two years’ time, and M&A deals are not the type that will yield profits in the short term, as mentioned previously;
- management – short-term view and lack of expertise. It is considered to be one of the key aspects of M&A activity. Short sighted management decision-making can lead to significant financial failures, similarly, efficient and well informed managers, who know their company’s strengths and weaknesses thoroughly, can lead the deal to success. In many cases company managers act just like fund managers, where the horizon is short term and results are expected by the end of the financial year. What will happen in five years time is not of interest, similarly to the lessons that should have been learned from the past experiences.
According to the experts interviewed, top managers usually show very short memory of past events (this has also been proven in many studies analysing financial behaviour), and very rarely learn lessons from mistakes made in the past. Therefore, it is typically the case that even important decisions are being made with a short-term view, based only on the current situation, without learning from past mistakes or even taking into account opinions from independent advisors. Although it seems that the company might be looking long-term, explaining that the deal is aimed at profit and efficiency maximisation, often in reality decisions about M&A are made by top managers without looking at the financial evidence, and are based purely on what seems right or what would be ‘good to have’, for the company to expand in size and become more global, which does not necessarily mean profitability or efficiency. In the case of the Allianz-Dresdner Bank deal, top management ignored the warnings from the outside about the problems that Deutsche Bank faced, for example, the high cost to income ratio, and proceeded with a deal which at the time was considered to be unwise.
