The Value Killers

Nuno Fernandes is Professor of Finance at IESE Business School. This is based on a book, recently published with Palgrave Macmillan. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders?; M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice; and Why Have M&A Contracts Grown? Evidence from Twenty Years of Deals, all by John C. Coates, IV.

In a business climate marked by escalating global competition and industry disruption, successful mergers and acquisitions are increasingly vital to the growth and profitability of many companies.

Yet research shows most mergers fail—destroying shareholder value and costing companies billions in dollars. Over the decades, multiple studies have shown that most mergers and acquisitions fail to generate the anticipated synergies—and many actually destroy value instead of creating it. In other words, a significant percentage of M&As cause 2 + 2 to equal 3 instead of 5.

So, why do so many companies continue to pursue these value-destroying deals? What can be done to reverse this sad state of affairs? How can companies dramatically increase the odds that their future M&As will be among the minority that actually succeed? And how can managers and boards increase their odds of M&A success?

In The Value Killers: How Mergers and Acquisitions Cost Companies Billions—And How to Prevent It (2019, Palgrave Macmillan), I tackle these topics head on by undertaking a thorough examination of why mergers and acquisitions commonly fail. The book offers a practical guide for how to avoid the common M&A pitfalls, and steer companies towards better deal making.

If there is one, overriding “take-away” from this book, it is this: If the acquiring company pays too much for the target, it will destroy value, even if all of the projected synergies materialize. This seems both simple and obvious, but the reality is that most companies overpay. In fact, one could make an argument that, directly or indirectly, overpayment is the cause of the high M&A failure rate. It is the direct cause when a buyer overvalues the target’s assets or overestimates anticipated synergies—as was the case when HP purchased Autonomy. It is an indirect cause when other factors (e.g., the culture clash that ensued after the Daimler-Benz/Chrysler merger) cause millions or billions of dollars in predicted synergies to later evaporate.

However, it is possible to beat the long odds against M&A success, but this requires rigorous planning and attention to detail, starting in the pre-acquisition phase. It also requires a thorough understanding and meticulous execution of the some key principles.

In this new book, I propose five Golden Rules managers should follow to maximize the odds of M&A success. The five Golden Rules are based on many real case studies, scores of executive interviews and further research. The voices of investment bankers, consultants and other experts also enliven the M&A lessons through the book’s six chapters. In addition, each chapter includes questions for executives considering future M&A to allow them to see whether they are on the right track or not.

Golden Rule 1: Don’t Rely on Investment Bankers for Valuation. Investment banks are good for roadshows and financing, but they should never be used for valuing or negotiating the deal. Because investments banks receive much larger fees when the deals are closed, bankers are always on the side of the deal, not the company’s side. Whenever possible, companies should develop valuations in-house or with the aid of third-party advisers who are less likely to be biased. Furthermore, all employees who are involved in providing estimates should understand the principles of M&A value creation, as well as basic valuation skills. The key principles of valuation include: the stand-alone value of the target company; its value with synergies; cash-flows and their changes due to the deal; market and transaction multiples; and previous premiums paid.

Golden Rule 2: Avoid “Strategic” Deals. There are many good, quantifiable reasons for doing M&A deals. They include increasing a company’s product range, broadening its distribution, improving its manufacturing capabilities and reducing unit costs. Unfortunately, there are just as many bad reasons. They include boosting the CEO’s ego and salary, empire-building and doing a “strategic deal”—a catchall phrase for a transaction whose benefits cannot be quantified. In theory, there’s nothing wrong with characterizing an acquisition as “strategic.” In practice, though, the word is often misused by the champions of flawed deals to mask the shortcomings, silence a deal’s opponents, or both. The “strategic” argument can be difficult to refute, which may be why some CEOs like to use it. Unfortunately, it is too often used when the numbers do not work….but top managers still want to close the deal.

Golden Rule 3: Link the Before and After. Companies must have a continuous process that links the pre-deal phase with the transaction period and the post-deal phase. The firms most likely to destroy value are those that fail to assign detailed responsibilities and strict accountability to the teams in charge of researching, planning, negotiating and implementing the acquisition. Too often, the people making promises about merger synergies are not the same ones in charge of putting those synergies into place. Ideally, companies should assign the same team members to every phase of the transaction, including the post-merger integration.

Golden Rule 4: Think Like a Financial Investor. Overpaying is the single biggest predictor of a merger disaster. How to avoid it? Act like a financial investor: set a “walk-away price” and stick to it. Executives must be ready to say no to deals that exceed the “walk-away price.” Successful acquirers develop models to identify the pros and cons of a deal, they avoid bidding wars, they exercise the discipline to walk away from bad deals, and they establish processes to keep CEO emotions in check. Overconfidence is a notorious value killer, and the Board of Directors has a strong role to play here.

Golden Rule 5: Move Fast and Communicate Transparently. The uncertainty generated by potential mergers takes a terrible toll on employees and customers. Bad news is often better than no news, so managers should be ready to answer questions even before the final answer is known. Companies that communicate quickly, constantly and openly during M&As are better able to retain their focus and reduce uncertainty among customers and employees, especially the best employees of the target company. Because talent exodus is a big risk during most M&As, senior managers must be ready to answer the “What happens to me?” question before employees even ask it. Moreover, management must not become so distracted during the deal that its focus is entirely pulled away from the firm’s day-to-day operations, including adequate communication with customers and other business partners.


The fact that most M&As fail to create value for shareholders of the acquiring company is neither a random occurrence nor “bad luck”. It is possible to beat the long odds against M&A success, but this requires rigorous planning and attention to detail, starting in the pre-acquisition phase. The 5 Golden Rules, which are based on extensive research, are designed to maximize the odds of M&A success by providing executives with a template for distinguishing between deals that offer long-term growth opportunities and those likely to generate value-destroying activities.

It is not enough to have an internal M&A department (or business development group). Most companies have these, but still fail. Instead, successful M&As require that business and finance work together. It requires that business executives be aware of how M&As can create value, as well as their role in that value-creation process.

If more companies follow the 5 Golden Rules, the years ahead will feature a much higher quality of M&As, and not just higher quantities.

The book is available here.

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