13 worst merger failures in history
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Mergers and acquisitions come with many expected benefits — from reducing financial risks and diversifying the portfolio to increasing plant capacity and gaining a larger market share. However, often deals between two or more companies end in failed mergers. According to McKinsey, about 10% of all large deals are canceled every year.
In the world of M&A, a failure means that the deal ends up as rather unprofitable for both parties.
The article below comprises the top 11 mergers that failed. Keep reading.
- Among the biggest deal failures are the deal between AOL and Time Warner ($165 billion), Daimler Benz and Chrysler ($37 billion), and Sprint and Nextel Communications ($35 billion).
- The top reasons for deal failure include an inability to execute post-integration plans, inadequate due diligence, unrealistic expectations, misunderstanding of the united company’s strategy, and cultural differences.
Worst mergers and acquisitions in history across different industries and business sectors
Regrettably, not every merger and acquisition deal proves to be successful, especially in the long run. Many of these merged companies fail to stand the test of time, fall like a pack of cards, and end up in corporate divorce.
We’ll explore some of the worst mergers and acquisitions in history across different industries and business sectors. These will include:
- AOL and Time Warner (2000) — $165 billion
- Alcatel and Lucent (2006) — $13.4 billion
- Bank of America and Countrywide (2008) — $4 billion
- Caterpillar and ERA (2012) — $677 million
- Daimler Benz and Chrysler (1998) — $37 billion
- eBay and Skype (2005) — $2.6 billion
- Microsoft and Nokia (2014) — $7 billion
- New York Central and Pennsylvania Railroads (1968) — N/A
- Sprint and Nextel Communications (2005) — $35 billion
- Mattel and the Learning Company (1998) — $4.2 billion
- Quaker and Snapple (1994) — $1.7 billion
- Sears and Kmart (2005) — $11 billion
- Google and Motorola (2012) — $12.5 billion
Reason for failure: cultural clashes, inadequate due diligence, misreading of the new media landscape, lack of vision for post-integration steps
This particular acquisition ranks as one of the worst M&A deals ever. In 2000, AOL (America Online), was riding high on the dot-com bubble and was the leader in dial-up internet access in America.
By purchasing Time Warner for around $165 billion, and creating a company worth $360 billion, America Online hoped to capitalize on its dominance by distributing the media company’s content across two companies networks. For Time Warner, meanwhile, the sheer reach that AOL could offer made the prospect of a join-up extremely attractive. But the synergy between these two dynamically different companies never happened.
So what went wrong? The first problem was the bursting of the tech bubble — by the end of 2002, the company was forced into a goodwill write-off of almost $100 billion, and its market cap dropped from $226 billion to just $20 billion.
AOL, a top internet and email provider, also wasn’t able to shift its services from dial-up to broadband, and there were rumors of a difficult culture clash between the two sets of staff. This led to the AOL and Time Warner merger crashing like a pack of cards and made the deal between the two companies one of the biggest merger failures in history.
Reason for failure: clashes between two corporate cultures,
Next up is a 2006 $13.4 billion merger between two telecom companies — Alcatel and Lucent. The former was a French leader in fixed line and broadband services, the latter was a US wireless provider spun off from AT&T in the 90s.
In theory, the partnership looked promising. Together, the two companies could create a multinational telecommunications powerhouse to deal with the growing completion from Chinese networking vendors such as Huawei Technologies. But by 2008, Alcatel Lucent had endured six quarterly losses, write-downs of $4.5 billion, and the halving of its share price.
Again, cultural issues came to the fore. Lucent was far more centralized and hierarchical, and obsessed with cutting costs; Alcatel had a much looser management structure and put a greater emphasis on marketing than their American counterparts. Additionally, language was often a barrier.
As a result, Alcatel-Lucent company was acquired by Nokia in 2016 for $15.6 billion.
Reason for failure: Misevaluation
In 2008, when financial giant Bank of America set out to acquire control over mortgage lender, Countrywide, for $4B, it seemed like a seamless way to expand the business. Unfortunately, their efforts failed miserably when the housing bubble burst that same year.
This led to Bank of America ultimately paying nearly $40B in total in fines and real estate losses resulting from Countrywide’s lending practices. As a result, the Bank of America and Countrywide merger turned out to be one of the worst corporate mergers ever. The Wall Street Journal described it as “the worst deal in the history of American finance”, and that’s for a good reason.
Reason for failure: Misevaluation, due diligence oversights
Caterpillar, a US heavy equipment titan, purchased ERA Mining Machinery Ltd. for $677 million in 2012 as part of a strategy to expand the Chinese coal market. This sounded like an amazing idea as leveraging the large Chinese coal market was a convenient way to make more money.
With this arrangement, ERA started serving as the holding company for Zhengzhou Siwei Mechanical & Electrical Equipment Manufacturing Co Ltd., one of China’s top manufacturers of hydraulic roof supports for coal mines.
The deal seemed easy money, but as the result of due diligence oversights on Caterpillar’s part and long-term accounting misconduct at Siwei, Caterpillar took a $580 million write-down in 2012.
Nearly two decades after the deal announcement, the union between Caterpillar and ERA remains one of the worst mergers in history.
Reason for failure: Cultural clashes, weak post-integration milestones step planning
Chrysler, the third-largest automaker in America, and Daimler-Benz, one of the world’s most opulent automakers, merged for $37 billion to form a new company, DaimlerChrysler AG on May 7, 1998. It became the largest acquisition of a US corporation by a foreign buyer when the actual merger was finalized.
The arrangement saw the owners of Daimler owning the bulk of the new company’s shares, and the aim to create Daimler Chrysler was to establish a trans-Atlantic auto manufacturing behemoth that would rule the markets. Unfortunately, they never truly became a combined company due to cultural differences, with the envisioned synergies never materializing.
Although the acquisition of automaker Chrysler and Daimler-Benz was initially perceived as a merger of equals, that wasn’t the true position of things. Instead, Daimler allegedly used aggressive tactics to tell Chrysler how to run its business as it gradually turned into a takeover of Chrysler.
In the end, the two organizations were unable to work together and continued to function independently, leading to the two companies disintegrating. Eventually, Daimler-Benz sold Chrysler to Cerberus Capital Management Firm, which specialized in restructuring troubled companies, for $7B in 2007.
This is one of the worst mergers in history resulting from corporate culture clashes.
Reason for failure: inadequate mission vision, incorrect objectives’ placement, lack of users’ needs understanding
In 2005, eBay thought it was onto something big. By buying Skype for $2.6 billion, they were purchasing the communication medium of the future — users would be able to speak to each other for free from anywhere in the world. In a way, they were right; 6 years later, Microsoft thought Skype was worth $8.5 billion.
The only flaw was that eBay users didn’t actually want to speak to each other — in fact, they enjoyed the anonymity and convenience that the site offered. eBay was also run as a fairly conservative company, while Skype was aiming to be a disruptive force.
The online auction site eventually bit the bullet, selling Skype on to private investors for $1.9 billion in 2009. This made it one of the worst corporate mergers in the history of data rooms.
Reason for failure: Nokia’s inability to keep up with the developments
When it comes to platform wars, Microsoft failed to get involved early enough and significantly lagged behind Apple and Android. So, although a new Windows Phone with a new platform was released in November 2010, consumers never took to it.
Steve Ballmer, the CEO of Microsoft, saw a chance in Nokia in 2013, a Finnish phone manufacturer that was losing market share to rivals. In a 2014 agreement, Ballmer oversaw Microsoft’s acquisition of Nokia for nearly $7 billion. The Lumia phone line, their new joint venture, failed to get the developer and carrier alliances required for the phone to become popular as the companies hoped. This made the acquisition rapidly become a failure, with Ballmer leaving the company shortly after.
Having no choice but to streamline the business, Satya Nadella, the new CEO, began significant reorganization and layoffs which resulted in the termination of 15,000 Nokia employees. The acquisition’s write-down amount in 2015 was $7.6 billion.
In 2016, Microsoft sold Nokia to HMD for $350 million.
Reason for failure: big cultural differences, poor management, inadequate strategic planning, overly optimistic expectations of changes after the deal
Pennsylvania Railroads merged with New York Central in 1968 to form Penn Central, America’s sixth-largest corporation and largest company in the transportation sector at the time. Unfortunately, however, they declared bankruptcy two years later.
The New York Central and Pennsylvania Railroads merger made a lot of sense in theory. However, in reality, these railroads had been bitter rivals for more than a century and were frantically attempting to escape the shift away from trains and toward cars and airplanes.
In the end, the railways were forced to make significant cost cuts due to their inability to keep up with the increasing cost of workers and governmental restrictions. Many other factors were responsible for this merger failure, with experts citing cultural differences, poor management, and inadequate long-term planning as culprits.
Reason for failure: cultural differences, lack of trust between management, inability to keep up with the market competition
Sprint acquired a majority stake in Nextel in 2005 at a cost of $35 billion. The resulting target company became the third-largest telecommunications provider in the US, behind AT&T and Verizon. Sprint was focused on providing local, long-distance, and wireless services to the traditional consumer market, while Nextel had a strong presence in the commercial market and was driven to develop more cutting-edge products and markets. The main objective of the deal between Sprint and Nextel Communications was to maximize revenue by pooling customers and services (gaining access to each other’s customer bases) and cross-selling their product and service offerings.
Again, differences in culture and practice proved damaging, with Nextel employees having to seek approval from Sprint’s executives to adopt corrective measures and Nextel executives exiting the company for this reason. Sprint was run as a bureaucracy, while Nextel was run with an entrepreneurial spirit; Sprint’s customer service was awful, while Nextel’s was excellent. The two businesses weren’t successfully integrated either — there was a lack of trust, and the two companies even maintained their separate headquarters.
By 2008, $30 billion in one-time changes had to be written off. Later, a junk status rating was stamped on its stock.
There’s never a guarantee that an M&A deal will come off — particularly in the fast-changing world of technology. What the best companies can do is ensure they have as much information at their disposal as possible — whether through virtual data rooms or high-caliber advisory services.
Reason for failure: misevaluation, inadequate mission vision
The Learning Company, the establishment behind “Where in the World is Carmen Sandiego?” and “Myst,” was acquired by Mattel in a stock-for-stock deal that saw TLC valued at about $4.2 billion. Mattel has long been a household name in traditional toys, but in 1998, it decided to try to break into the rapidly growing high-tech toys and software game market.
Unfortunately, the Learning Company reported a $206 million loss for 1999 due to a large number of year-end refunds that arrived fairly soon. As expected, this significantly affected Mattel’s bottom line, led to overwhelming financial constraints, and triggered other problems.
A year later, Mattel agreed to a no-cash-upfront arrangement with Gores Technology Group, in which it effectively handed away this acquisition that had become a thorn in their flesh. Although Mattel incurred a $430 million after-tax loss, there was a chance of a profit if Gores turned the business profitable, which he did only 75 days after the handover.
Then, in 2001, Gores sold a few non-core entertainment assets to the French video game business Ubisoft and some educational assets to Software guru Riverdeep, which specializes in engineering K–12 learning solutions.
Reason for failure: inadequate mission visions, inadequate strategic planning, the choice of wrong marketing objectives
The intention was to increase the popularity of Snapple drinks based on inspiration from their success with Gatorade. Quarter Oats’s determination to succeed in this quest propelled them to launch a new marketing campaign and introduce Snapple to every supermarket and chain restaurant possible. They paid deaf ears to Wall Street’s concerns that they paid $1 billion too much for the fruity beverages and failed to take Snapple’s market in gas stations and convenience stores.
Unfortunately, Snapple’s niche already revolved around gas stations, independent stores, etc. They couldn’t thrive in large grocery stores and other national retailers, and this led to their downfall. When nothing seemed to be working, Quaker Oats sold Snapple for $300 million around two years later. The holding company owned Snapple as they made a daily loss of $1.6 million.
12. Sears and Kmart
Reason for failure: inadequate strategic planning, inability to keep up with the market competition
At the time of the deal announcement in November 2004, Sears and Kmart were both struggling to compete with such big retailers as Target and Walmart.
Edward Lampert, a hedge fund investor and, at that time, a chairman of Kmart, decided to change that by purchasing failing Sears and Kmart and merging them into one company — Sears Holdings. The deal was estimated at $11 billion and was closed in March 2005.
However, the deal expectations were not met. The newly formed company, Sears Holdings, continued the downward spiral of Sears and Kmart. The company’s revenue dropped more than 10% between 2005 and 2009 years. While the sales of its main competitors — Walmart, Target, and Macy — rose about 31%, 24%, and 5% respectively in the same period.
Some consider their focus on “soft goods” (clothes and home goods) the main reason for failure, others blame the decision to compete with giant Walmart. Either way, the strategy of combining two failing companies into one has appeared to be a no-win.
As of 2016, Edward Lampert was considered the worst CEO in America. In October 2018, Sear Holdings officially filed for bankruptcy and sued the former CEO.
Reason for failure: Motorola’s inability to keep up with the expectations, subsidiary intentions behind the deal
In August 2011, Google announced its acquisition of Motorola Mobility for $12.5 billion. By the time of the deal announcement, Google’s operating system Android was already the second-biggest player on the market. The main driver behind the deal was Google’s intention to use Motorola’s patent portfolio to protect the Android ecosystem and develop high-quality mobile phones.
The deal was closed in May 2012. However, the merger didn’t work out, mainly because Motorola’s phone quality appeared to be too poor. Nevertheless, many don’t consider this deal a failure at all, as a part of the contract, Google gained access to Motorola’s patent portfolio with 17,000 technology patents. Some experts believe this was the exact Google’s intention behind the merger.
In 2014, Google sold Motorola to the Chinese tech conglomerate Lenovo for $2.9 billion.
To conclude: why M&A deals fail?
Mergers and acquisitions are always about financial risks, and knowing how to avoid them is crucial for deal makers.
According to multiple studies, around 70-90% of all acquisitions fail, and, as the article confirms, the reasons for that are usually the same.
- Cultural differences. When two or more companies merge, it’s a much more complicated process than simply CEOs shaking hands. For a united company, it’s crucial to have one culture and help all staff members to easily integrate.
- Inability to execute post-integration plans. Often, companies fail to perform the objectives set before the merger. This is also a result of poor communication between the parties and a lack of clear definition of each side’s responsibilities.
- Hidden financial problems and inadequate due diligence. Sometimes, the numbers on paper differ drastically from those in real life. That’s why the importance of thorough due diligence is hard to overestimate — not only does it help to set up a fair merger price, but also reduces the risk of future financial losses.
- Unrealistic expectations and misunderstanding of the united company’s strategy. It’s common for two companies to differently understand the merger’s mission, which logically leads to conflicts on the way. Additionally, a united company risks losing its customers if management doesn’t understand their needs.
Probably the best example of a failed merger is the megadeal between AOL and Time Warner, worth $165 billion.
The deal between Vodafone and Mannesmann is considered one of the largest mergers in history, with a deal value of approximately $180 billion.
Among the biggest mergers that were blocked due to antitrust laws are the deals between Reynolds American and Lorillard, AT&T and T-Mobile, and U.S. Airways and American Airlines.