Billions To Lose Before We Weep

IIPM PUBLICATION
“Don’t! Please don’t! We beg you! It’ll destroy us! Completely...” Imagine millions of shareholders wailing in unison to their company’s management, repeatedly quoting innumerable analyst reports, bemoaning them not to undertake their supposedly “strategic” move to merge with another supposedly “perfect” match; and imagine the shareholders’ tragic state when, after their multitudinous pleas, the clearly adamant and overconfident management, led by an equally boisterous and slaphappy CEO on the lookout for some quick glory and sycophantic hagiographies in media, unbelievably goes ahead with the ridiculous merger; and to top it all, spins an equally unbelievable yarn of how “future synergies” between the merged firms would finally allow shareholders to obtain the jackpot of all riches... Imagine what would you call such a woebegone corporation! The answer’s simple: Tata Steel! And the other protagonists being their bubbleheaded management led by the lubriciously impulsive Ratan Tata succeeding in a delirious mad dash for taking over Corus Plc, the Anglo-Dutch steel giant.

Welcome to the elite company of fearless global CEOs, who, time and again, with heavenly promises of synergies, and under the insolent garb of indulging in high-valued and ambitious M&As, have actually succeeded in meticulously digging graves for corporations, which otherwise, organically, would have surely assumed greatness! Countless global researches have time and again statistically blown apart the preposterously fallacious chicanery of ‘synergy’ in mergers. Yet, ‘synergy’ is perhaps the biggest subterfuge and cocker of a calumny that pedantic braggadocio CEOs never fail to spout out whenever faced by irrefutable criticism of any merger deal. Ratan Tata, on February 1st, 2007, rambunctiously quoted, “We feel confident that the affinities between the two companies are such that the synergies would be quite substantial!” Laying it heavier, B. Muthuraman, MD of Tata Steel, orated to media, “Full synergies will start accruing from the third year... It’ll result in savings of $350 million a year!” Sadly for them, in the path-breaking book titled Mergers: Leadership, Performance and Corporate Health by David Fubini & Colin Price of McKinsey, and the authoritative Professor Zollo of INSEAD, the authors incontrovertibly proved that the major cause why mergers bomb is because “there are big bet deals based on exciting but illusory synergies and premiums that are so inflated that they are unrecoverable, no matter how well the integration is executed... Don’t let this happen to you!”

The litany continues. The ever merger-loving McKinsey grudgingly accepted in the ground-breaking report titled When Mergers Go Wrong that a jaw-dropping 70% of mergers actually “failed to achieve revenue synergies!” The report went on to pitifully prove how “most companies routinely overestimate the value of synergies...” Even the title of the imperiously commanding paper by Dr. Ulrike Malmendier of Stanford, and Professor Geoffrey Tate of Wharton – Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction – is most hilarious! Analysing the Forbes 500 list of firms over a period of 15 years, they apodictically asserted that the blame for all failed efforts to achieve synergies can be passed on to “Overconfident CEOs” who “over-estimate their ability to generate returns, thus undertaking mergers that destroy value!” Booz Allen Hamilton, in their report Merger Integration: Delivering On The Promise, shows how despite many rushes to altars and promises based on “solid synergistic potential...most mergers fail.” BCG, Pricewaterhouse-Coopers, KPMG, Harvard, Andersen, Kellogs, tell me a name and I’ll show you how these intellectual powerhouses have shown that killingly, up to 80% of synergy based mergers WILL ALWAYS FAIL! Guess some people travelling to Europe have been busier flying fighter jets and making hegemony filled media releases than reading any such report.

Expectably so, Tata Steel’s share prices have continuously tanked commiserably since the day of the merger announcement. Wretchedly, Standard & Poor’s have even downgraded the Tata Steel scrip to a “negative implication” credit watch list, what to talk about the so called Indian pride of taking over a European firm. But does all this seem to be having any repercussion on the strategic orientation of our truly Indian bunch of injudicious impresarios? As my strategy professor belligerently commented once, perhaps for these incoherent synergy-possessed CEOs, “M&As are nothing but... Murders & Acquisitions!” Or as Tata Steel MD Muthuruman’s famous gleeful comment went after the Corus victory, “We are damn tired!” Sorry to bother you dear Sir, but if you’ve not noticed, so are we!

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Source : IIPM Editorial, 2007

An IIPM and Malay Chaudhuri (Founder of IIPM) – Arindam Chaudhuri (Dean of IIPM) Initiative