CEOs have ripped apart shareholders’ wealth globally under the guise of M&As; Indian firms more so! B&E’s Manish K. Pandey, Deepak R. Patra and Karan Mehrishi undertake the most radical analysis of the recent past and destroy age-old perceptions!
But Indians, as we said before, never learn! But hey, isn’t India too supposed to grow on the back of mega-merger deals? Isn’t L. N. Mittal, who succeeded in merging his company with Arcelor (the world’s largest steel corporation), the new purveyor of the rise of Indians? Aren’t flamboyant Indian companies like Tata Steel, Suzlon, Aditya Birla Nuvo, GMR Infra, TCS, Ranbaxy, Apollo, Videocon, ONGC and many more – which have accounted for multi billion dollar M&A deals in the last three years while taking over foreign and domestic corporations – sparkling benchmarks of corporate excellence?
And what about the paeans being sung in the praise of indisputable leaders like Tata Coffee (which bought off 30% of Energy Brands Corporation in the US for an unbelievable $677 million), Dr. Reddy’s Labs (which snapped up Germany’s Betapharm for a gigantic $576 million), Ranbaxy (which gobbled up Terapia of Romania for a smothering $324 million) and innumerable more? Are we simply supposed to believe that most of these Indian M&A deals are, er, stupid? Considering shareholder value, revenue growth, cost synergies, and almost everything a company could have stood for, the answer is yes!
We started with the May 2008 BCG report (The Return of the Strategist) where this former supporter of M&As confirms, “The key question is not whether deal volumes and values will fall or rise, but whether it is still [ever] possible to generate [any] value from [M&A] transactions!... More than half of mergers destroy value for acquirers’ shareholders!” The May 2007 research (Why M&A Deals Are Bad For Shareholders) of the motherlode of all institutions, HBS, quotes, “Most M&A deals destroy shareholder value!”
How has the thinking been a few years back? The April 2004 HBS paper (Should We Brace Ourselves For Another Era Of M&A Value Destruction?) states eloquently, “In the end, M&A is a flawed process, invented by brokers, lawyers and CEOs with super-sized egos!” MarkSirower, author of the famous book Synergy Trap, shows how, on an average, 2/3rds of all deals end up destroying shareholder value. Even the famed McKinsey, once a fanatic supporter of M&As, had to accept that in the US & UK, only one quarter of all M&As even recovered the merger costs.
Their November 2001 hallmark paper (Why Mergers Fail) stated prophetically, “The belief that mergers drive revenue growth could be a myth!” In that paper, McKinsey showed how a massive 78% of companies failed to manage significant growth over a period of three years post the M&A! Professors Weber and Camerer of Carnegie Mellon University, in April 2003, statistically showed in their benchmark thesis (Merger Failure...) that “a majority of corporate mergers fail!” The Economist reported in 1999,“Study after study has shown that 2/3rd of all deals haven’t worked!” CEO Magazine reported similarly, “75% of M&As are disappointing or outright failures!” BCG’s sparkling July 2007 report, The Brave New World of M&As, documents, “Larger deals destroy progressively more value!... Deals that are above $1 billion destroy nearly twice as much value as those under $1 billion!” The hugely referenced Business Strategy Review‘s 2005 paper (Merging on the Miraculous) had the first line, “More than 2/3 M&As fail to create meaningful shareholder value.” The Gartner/Forbes Executive Survey of February 2007 asked top global executives to rank various business issues. ‘Managing M&As’ came last on the 25 factor list! Factors like ‘Attracting and retaining skilled workers’, ‘attracting new customers’, ‘Increasing market share’ etc. were ranked miles above M&As! The Economist Intelligence Unit’s outstanding briefing (Corporate Priorities For 2007) goes better! When more than 1,000 global CEOs were asked, “Which forces will have the greatest impact on the global marketplace in the coming 3 years?,” they ranked ‘M&A activity’ sixth from the bottom! Hilariously, below this were only factors like ‘Catastrophic events (eg. terrorism, natural disasters)’, ‘Advances in back office technologies’, and of course, ‘Others’.
The NYSE CEO Report 2008 put the final nail in the M&A coffin by giving the empirical evidence that “most CEOs think revenue growth in their own companies will be driven far more from organic growth than M&A activity!” It also shows how there is a direct correlation between organic growth and a company’s market capitalisation! Global M&A deals touched $4.48 trillion in 2007 (from $3.61 trillion in 2006); Indian deals touched $51.11 billion in 2007 (from $20.30 billion in 2006).
But Indians, as we said before, never learn! But hey, isn’t India too supposed to grow on the back of mega-merger deals? Isn’t L. N. Mittal, who succeeded in merging his company with Arcelor (the world’s largest steel corporation), the new purveyor of the rise of Indians? Aren’t flamboyant Indian companies like Tata Steel, Suzlon, Aditya Birla Nuvo, GMR Infra, TCS, Ranbaxy, Apollo, Videocon, ONGC and many more – which have accounted for multi billion dollar M&A deals in the last three years while taking over foreign and domestic corporations – sparkling benchmarks of corporate excellence?
And what about the paeans being sung in the praise of indisputable leaders like Tata Coffee (which bought off 30% of Energy Brands Corporation in the US for an unbelievable $677 million), Dr. Reddy’s Labs (which snapped up Germany’s Betapharm for a gigantic $576 million), Ranbaxy (which gobbled up Terapia of Romania for a smothering $324 million) and innumerable more? Are we simply supposed to believe that most of these Indian M&A deals are, er, stupid? Considering shareholder value, revenue growth, cost synergies, and almost everything a company could have stood for, the answer is yes!
We started with the May 2008 BCG report (The Return of the Strategist) where this former supporter of M&As confirms, “The key question is not whether deal volumes and values will fall or rise, but whether it is still [ever] possible to generate [any] value from [M&A] transactions!... More than half of mergers destroy value for acquirers’ shareholders!” The May 2007 research (Why M&A Deals Are Bad For Shareholders) of the motherlode of all institutions, HBS, quotes, “Most M&A deals destroy shareholder value!”
How has the thinking been a few years back? The April 2004 HBS paper (Should We Brace Ourselves For Another Era Of M&A Value Destruction?) states eloquently, “In the end, M&A is a flawed process, invented by brokers, lawyers and CEOs with super-sized egos!” MarkSirower, author of the famous book Synergy Trap, shows how, on an average, 2/3rds of all deals end up destroying shareholder value. Even the famed McKinsey, once a fanatic supporter of M&As, had to accept that in the US & UK, only one quarter of all M&As even recovered the merger costs.
Their November 2001 hallmark paper (Why Mergers Fail) stated prophetically, “The belief that mergers drive revenue growth could be a myth!” In that paper, McKinsey showed how a massive 78% of companies failed to manage significant growth over a period of three years post the M&A! Professors Weber and Camerer of Carnegie Mellon University, in April 2003, statistically showed in their benchmark thesis (Merger Failure...) that “a majority of corporate mergers fail!” The Economist reported in 1999,“Study after study has shown that 2/3rd of all deals haven’t worked!” CEO Magazine reported similarly, “75% of M&As are disappointing or outright failures!” BCG’s sparkling July 2007 report, The Brave New World of M&As, documents, “Larger deals destroy progressively more value!... Deals that are above $1 billion destroy nearly twice as much value as those under $1 billion!” The hugely referenced Business Strategy Review‘s 2005 paper (Merging on the Miraculous) had the first line, “More than 2/3 M&As fail to create meaningful shareholder value.” The Gartner/Forbes Executive Survey of February 2007 asked top global executives to rank various business issues. ‘Managing M&As’ came last on the 25 factor list! Factors like ‘Attracting and retaining skilled workers’, ‘attracting new customers’, ‘Increasing market share’ etc. were ranked miles above M&As! The Economist Intelligence Unit’s outstanding briefing (Corporate Priorities For 2007) goes better! When more than 1,000 global CEOs were asked, “Which forces will have the greatest impact on the global marketplace in the coming 3 years?,” they ranked ‘M&A activity’ sixth from the bottom! Hilariously, below this were only factors like ‘Catastrophic events (eg. terrorism, natural disasters)’, ‘Advances in back office technologies’, and of course, ‘Others’.
The NYSE CEO Report 2008 put the final nail in the M&A coffin by giving the empirical evidence that “most CEOs think revenue growth in their own companies will be driven far more from organic growth than M&A activity!” It also shows how there is a direct correlation between organic growth and a company’s market capitalisation! Global M&A deals touched $4.48 trillion in 2007 (from $3.61 trillion in 2006); Indian deals touched $51.11 billion in 2007 (from $20.30 billion in 2006).
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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