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2. Returns to bidders have fallen over time as the market for corporate control becomes
more competitive; recent evidence finds bidder returns indistinguishable from zero or even
slightly negative.
3. The combined return of the target and the bidder (i.e., the measure of overall value
creation) was slightly positive.
However, these results are highly variable depending on the specific samples and time periods
analyzed. The findings on the long-term performance of mergers and acquisitions are not any more
consistent or encouraging. Agrawal et al. (1992) report that “shareholders of acquiring firms
experience a wealth loss of about 10% over the five years following the merger completion.” Other
studies‟ conclusions range from underperformance to findings of no abnormal postmerger
performance. The strongest conclusions offered by Weston et al. (1999, 133 and 140) are that “It is
likely, therefore, that value is created by M&As” and that “Some mergers perform well, others do
not.” So much for the brilliance of the academy!
If the academic literature seems ambivalent about judging the financial wisdom of M&A decisions,
the popular business press shows no such hesitancy. In a 2002 special report, BusinessWeek carefully
analyzed over 300 recent deals valued at $500 million or more and reported, “Fully 61% of buyers
destroyed their own shareholders‟ wealth” (Henry and Jespersen 2002). This value destruction is
primarily attributed to overpaying for the target. These dismal results hold for both the acquirer‟s
short-term and long-term performance, and are by and large predicted by investors at the time of
announcement. An early article exploring the same topic makes the point that poor performance is not
a benign result, and places the blame squarely on corporate CEOs (Zweig et al. 1995).
All this indicates that many large-company CEOs are making multibillion-dollar decisions about
the future of their companies, employees, and shareholders in part by the seat of their pants.
When things go wrong, as the evidence demonstrates that they often do, these decisions create
unnecessary tumult, losses, and heartache. While there clearly is a role for thoughtful and wellconceived
mergers in American business, all too many don‟t meet that description.
Moreover, in merging and acquiring mindlessly and flamboyantly, dealmakers may be eroding
the nation‟s growth prospects and global competitiveness. Dollars that are wasted needlessly on
mergers that don‟t work might better be spent on research and new-product development. And in
view of the growing number of corporate divorces, it‟s clear that the best strategy for most
would-be marriage partners is never to march to the altar at all.
—BusinessWeek, October 30, 1995
A 1996 survey of 150 companies by the Economist Intelligence Unit in London found that 70% of
all acquisitions failed to meet the expectations of the initiator. Coopers & Lybrand studied the
postmerger performance of 125 companies and reported that 66% were financially unsuccessful. In
summary, there is extensive evidence that most mergers benefit the acquired company at the expense
of the buyer‟s shareholders.
We now turn our attention to three specific M&A transactions. (See Exhibits 17.5, 17.6, and 17.7.)
While not the most recent deals, these are all well-known companies and brands, and as examples they
very clearly highlight the all-too-common pitfalls. As the BusinessWeek articles painfully show,