I blame spring week and summer recruiting for the number of times I told an interviewer that M&A was my passion and intellectual calling. I had to read up on so many deals – looking at each bank’s transactions and picking one to express my amazement at the genius of such a deal. Now, I never actually loved the thought of M&A – nor would I think any reasonable person would choose to study a corporate action over going to the pub.
However, it was in Strategy Class as part of the E&M curriculum that I learnt about how M&A was seen by many academics as a value-destroying activity. It’s so difficult to reconcile the vast sums companies pay investment banks to churn out an acquisition, with the notion that these are often inherently bad for the acquirer. Are the famed tough working conditions with long hours of an M&A investment banker all for nothing then? And how is it that these top leaders of corporations would take on the risk of a merger for something that is commonly acknowledged to be harmful for their companies?
It would be hubristic of me to assume that Said Business School has taught me something that these corporate leaders are ignorant of. To be sure, there are strong compelling arguments for M&A.
M&A benefits
As a whole, merging two companies to form a larger company – a process reminiscent of agar.io – can bring benefits by creating an organisation stronger than the sum of its parts.
There are synergies that can occur. Economies of scale that reduce duplicate costs – ten companies can share a single IT system when consolidated instead of ten separate IT systems at marginally higher costs.
Furthermore, consolidation can increase the bargaining power of a company when it comes to dealings with customers and suppliers. While antitrust has come a long way since John D. Rockefeller used the might of Standard Oil to crush his rivals, the sheer advantage large companies have in negotiating is obvious. Apple is known for squeezing the multiple suppliers within its supply chain selling all kinds of widgets that go into the iPhone.
Where does the synergy go?
Unfortunately, for the acquirer, M&A tends to gift the value creation from synergies to the seller, because the buyers are often in a competitive situation, unless there are strong synergies between one buyer and seller that allows the seller some leverage (Barney, 1988). However, there are rarely multiple sellers at the same time. As such, the seller is able to seek out a higher price and squeeze buyers for the most competitive bid. Let’s take a theoretical example of a company A worth £100 Million. Company A can create synergies of £20 million through an acquisition by either Buyer Y or Z. Y or Z would find it rational to buy the company at anything less than £120 million, hence allowing company A to push the price up to £119 million, hence draining 90% of the synergy through competitive bidding.
Furthermore, the purchase prices can be inflated due to optimism as well as vested interests. In this case, instead of the true synergies being £20 million, maybe the acquisition only drives £5 million in synergies. The buyer (whether Y or Z) would hence have overpaid £119 million for a company worth £105 million. This can be attributed to managerial failure.
Managers are human too
CEOs tend to be excessively engaged with M&A in order to grow their empires rapidly using money that does not belong to them. CEOs are often imbued with hubris, where it has been found that every increment of media praise led to a 1.6% in aquisition premium (Hayward & Hambrick. 1997). Chatterjee & Hambrick (2007) found that the greater the narcissistic tendencies of the CEO, the greater the number and size of acquisitions.
Managers may also seek to acquire companies because it entrenches their position. Shleifer & Vishnu (1989) write that managers may make firm-specific investments that they are uniquely suited to manage, hence resulting in a deterrent cost to firing these managers. If that is the overriding consideration, it is no wonder that companies may make value-destroying acquisitions. Jeff Immely diversified General Electric’s core industrial business, with deep operational complexity. He then used his specialised knowledge as a reason why he should retain his job.
Integrating two separate companies comes with major challenges as well. When Nest was bought by Google, the Nest team found themselves shocked by the culture and struggling to fight for resources. The Nest team has claimed that there were no incentives for the employees of each company to work together, resulting in duplicate efforts. Furthermore, a major area of synergy stems from the removal of duplicate functions. Since a successful acquisition could lead to middle-managers being sacked, few would cooperate fully to streamline corporate profits at the expense of their own livelihoods.
Companies may also move to merge despite it not making immediate financial sense, if their rivals are consolidating. This is used to preserve the size to continue competing, even if the purchase price demanded by the target company is unattractive when evaluated in a vacuum.
Being a dealmaker that walks away
Mergers and acquisitions often promise growth, innovation, and competitive advantage, but the reality is far messier. From inflated purchase prices driven by managerial hubris to the cultural clashes that derail integration, M&A frequently falls short of delivering its lofty promises. Yet, the allure persists, fuelled by an insatiable appetite for growth and the fear of falling behind in a consolidating industry.
This paradox highlights a fundamental truth: M&A is as much about psychology as it is about strategy. Behind every billion-dollar deal lies a mix of ambition, optimism, and sometimes, sheer hubris. While some acquisitions do achieve transformational success, many others are cautionary tales of misaligned incentives and missed opportunities.
Even as I marvel at the audacity of M&A deals orchestrated by the next investment bank I’m applying to, I also realise that perhaps the real genius for strategy lies not in the pursuit of growth at any cost, but in knowing when to walk away and having the discipline to do the same.
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