In recent months, announcements of multibillion-dollar mergers have become common as executives in technology, telecommunications, consumer goods, and retailing pursue cost savings and revenue increases by combining large and complementary companies. History shows, however, that the value created by mergers generally goes to the seller, not the acquirer. Our research indicates that this happens primarily because acquirers overestimate the synergies mergers yield and underestimate the costs they create.
Executives in acquiring firms could do a better job of estimating a merger's value if they reduced their expectations for revenue and cost synergies. These exhibits summarize the results of a 2002 postmerger-management survey, which revealed that 70 percent of mergers failed to achieve the predicted revenue synergies, while cost synergies were overestimated by at least 25 percent in a quarter of the mergers.
Other lessons learned from studying deals include the need to benchmark expectations against previous mergers and to be realistic about one-time costs and revenue dis-synergies, such as lost customers or disruptions of a company's ability to execute.
For more on how to determine the value of a merger—before it takes place—read "Where mergers go wrong." (Premium)
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