Top 11 Failed Mergers and Acquisitions of All Time
There are many reasons why a company would want to acquire another entity. But one thing is for sure, the acquirer aims to create value that will not be possible as a standalone business, also known as synergies. However, not all deals realize their projected synergies. Throughout history, there have been a handful of mergers and acquisitions that have been flat-out disasters.
In this article, M&A Science looks at 11 of the most notorious failed mergers and acquisitions of all time, together with insights as to how they fell apart and what to watch out for in your next transaction.
America Online and Time Warner ($165 Billion)
America Online Inc. announced its plans to buy Time Warner Inc. for $165 billion in shares and debt on January 10, 2000. AOL stockholders owned 55 percent of the new business, while Time Warner shareholders owned 45 percent, according to the transaction conditions.
The strategy was sound, and it had the potential to be transformative. Time Warner would suddenly have a new customer base of tens of millions. Conversely, access to Time Warner's cable network would benefit AOL.
This mega-deal took place during the dot-com boom. The dot-com bubble burst shortly after the deal closed, causing the company's AOL segment to lose a large amount of value. Advertising dollars vanished, and the corporation recorded a staggering loss of $99 billion dollars in less than two years. This transaction is considered one of the worst mergers of all time.
Apart from the catastrophe, the two companies had significant cultural challenges that due diligence failed to reveal. According to Steve Case, AOL's co-founder, the purpose was to seize the potential of technological convergence. However, some in the combined firm were not excited about the corporation's digital strategy.
AOL and Time Warner separated into two firms less than a decade after the deal closed.
Citicorp and Travelers Group ($83 Billion)
Citicorp and Travelers Group announced plans to merge on April 7, 1998, for $83 billion to establish the world's largest financial services firm, including banking, insurance, and investment activities. Citigroup was the proposed name for the new corporation, and was supposed to have 100 million consumers in 100 countries and 160,000 employees selling a wide range of financial products and services.
Travelers gained the capacity to promote mutual funds and insurance to Citicorp's retail clients as part of the merger. In contrast, Citicorp gained access to Travelers' more extensive client base of investors and insurance buyers. This deal was expected to pressure other financial firms to merge and test if consumers wanted a financial supermarket.
Cultural integration issues arose as a result of the merger. Citi's most significant issues were inflated costs, outdated technology, and employee retention following the merger. Citicorp had a cumulative return of 35.4% during the 279 days merger period. Travelers Group had a cumulative return of 41.49% in the 279 days leading up to the merger, from 10 days to 268+ days.
Citigroup broke off Travelers Property and Casualty into a subsidiary firm in 2002 because the predicted benefits failed to materialize. MetLife purchased Travelers Life and Annuity from Citigroup in 2005.
Daimler Benz and Chrysler ($37 Billion)
One of the most luxurious car makers globally, Mercedes-Benz manufacturer Daimler-Benz, merged with America's third-largest car company Chrysler for $37 billion. When the deal closed on May 7, 1998, this transaction marked the biggest acquisition by a foreign buyer of any US company in history.
The new company was called DaimlerChrysler AG, with Daimler's stockholders owning the majority of the shares. The strategy was clear; to create a trans-Atlantic car-making powerhouse that would dominate the markets.
Sadly, this was another case of corporate culture clashing. The two organizations were never integrated, and the projected synergies went unrealized.
This transaction was initially viewed as a merger of equals, which we all know is never the case. It slowly became a takeover of Chrysler by Daimler, and Daimler was rumored to be aggressive when telling Chrysler how things should be done. The two organizations ended up not getting along and continued to run as separate operations.
The merger was a disaster. In 2007, Daimler Benz sold Chrysler to the Cerberus Capital Management firm, who specialized in restructuring troubled companies, for $7 billion.
This deal has gone down as one of the most famous M&A fails in history.
Sprint and Nextel Communications ($35 Billion)
In August 2005, Sprint acquired a majority stake in Nextel Communications in a $35 billion stock purchase. The two combined to become the third-largest telecommunications provider, behind AT&T (T) and Verizon (VZ). By gaining access to each other's customer bases, both companies hoped to grow by cross-selling their product and service offerings.
However, due diligence didn’t recognize the problems that were about to come after closing.
The two companies' networks did not share the same technology and had zero overlaps, making integration a nightmare. They also found it difficult to merge operations and had clashing marketing strategies that allowed rivals to steal dissatisfied customers. As a result, they lost a large amount of market share.
Also, the merger was plagued with cultural differences and incompatibility. Sprint was bureaucratic, Nextel was more entrepreneurial. Shortly after closing, many employees and executives left.
Nextel employees often had to seek approval from Sprint's higher-ups to implement corrective actions. The lack of trust and rapport meant many such measures were not approved or executed correctly. Customer service suffered greatly, and Sprint struggled to keep its customers happy.
At the time of writing of this article, Nextel continues to be a subsidiary of Sprint, which was bought by T-mobile in April 2020.
1999 CBS and Viacom Merger ($35 Billion)
Viacom Inc. and CBS Corp. announced a blockbuster $35.6 billion merger in 1999, making it the most significant media acquisition. The deal combined the broadcasting giant (CBS), and movie-producing powerhouse (Viacom), with a total value of $80 billion.
Viacom, the combined company's name, was headed by Viacom Chairman Sumner Redstone, with CBS’s President Mel Karmazin as president. The deal was excellent on paper and was viewed as "scary" by Senate antitrust subcommittee Chair Mike DeWine. CBS was mostly in broadcast (both TV and radio), while Viacom's strengths were in film and cable TV.
But the deal didn't turn out as planned. After the merger, Karmazin had a hard time working with Redstone on whether or not the company was making enough big bets on future technology or blockbuster movies.
After four years of bickering over how best to manage the combined operations of Viacom and CBS, Karmazin ceded ground to Redstone and left the company. By 2005, Redstone decided to break up Viacom into two companies.
After the breakup, CBS proved to be a steady ship, while Viacom saw its shares stagnate as the company struggled to figure out how to adjust to the digital age.
Ironically enough, after nearly two decades, the two companies are merging once again.
Alcatel-Lucent ($13 Billion)
With the growing competition from Chinese networking vendors such as Huawei Technologies Co. and ZTE Corp., Alcatel SA decided to acquire Lucent Technologies for $13 billion in April 2006.
The deal was set to create a networking giant with a revenue of $25 billion, based on 2005 financial results, and a strong presence in North America and Europe. Alcatel expected to create cost synergies amounting to $1.6 billion per year by cutting loose 10% of the combined company's workforce.
But combining a European and American company was challenging, as both cultures often clashed. According to reports, Lucent executives found it hard to adapt to Alcatel's corporate culture and another big barrier was language.
For starters, Alcatel-Lucent is a French company, and they appointed a CEO who did not speak French. That alone raised issues and misunderstandings. By the end of 2008, the top two executives who engineered the deal had stepped down and left the company.
Even though the combination of the two companies created the world's largest maker of telecommunications network gear, the synergies that Lucent and Alcatel promised did not materialize.
HP and Autonomy ($11 Billion)
In October of 2011, Hewlett-Packard (HP) opted to acquire Autonomy for $11.7 Billion. HP bought big data firm Autonomy intending to make it the centerpiece of a plan to transform HP from a computer and printer maker into a software-focused enterprise services firm.
The deal quickly turned sour as HP recorded that the value of Autonomy was $8.8 billion within the year of purchase due to fraudulent accounting practices. They quickly uncovered that Autonomy was cooking the books by selling hardware at a loss to its customers while booking the sales as software licensing revenue.
Massive lawsuits were generated from this transaction. Shareholders sued HP amounting to $1 billion. Subsequently, HP sued Autonomy founder Mike Lynch for $5 Billion, claiming that this was an intentional cover-up and not a mistake.
On the other hand, Lynch claims that all of these problems were due to mismanagement on HP's part and that they didn't plan to integrate the company altogether. It is one of the most controversial and disastrous deals of all time.
After years of waiting, in January 2022, Hewlett-Packard won its civil fraud case against Autonomy’s Founder and Chief Executive Mike Lynch.
Kmart and Sears ($11 Billion)
In an attempt to create the third-largest retailer in the country, Kmart and Sears agreed to merge for $11 billion in November 2004. The new company was to be called Sears Holdings. Both companies were struggling, and the merger was supposed to give the two retailers a boost by combining their strengths.
The idea was to make the stores more competitive while staying focused on the customer. For consumers, the deal meant purchasing appliances and other hard goods at Kmart and more clothing at Sears, resulting in lower prices since the two chains no longer needed to compete. The projected cost savings and additional sales of the transaction were around $500 million a year after the merger.
Obviously, it didn't pan out.
Sears and Kmart are two of the most iconic names in U.S. retailing, but combining struggling companies is hardly the recipe for success. Analysts say that this was a double suicide deal.
Eddie Lampers, who engineered the merger, failed to reinvest in the company and instead milked it and stripped it of its assets over time.
In 2018, Sears Holdings filed for bankruptcy and closed 142 of its 700 remaining stores.
Microsoft and Nokia ($7 Billion)
In April 2014, Microsoft completed its acquisition of Nokia's mobile phone division for $7.2 billion. The two companies first formed a strategic partnership in 2011 that resulted in all Nokia smartphones running on the Windows Phone operating system. Despite Nokia having made impressive Windows phones, it was not enough to be profitable.
A year before the acquisition, Nokia was considering a move to Android and would, in theory, leave Windows with no OEM support. After all, it controlled more than 90 percent of the Windows Phone market.
Also, Steve Ballmer, the CEO at that time, was looking for a way to enter the mobile phone industry to better compete with Apple and Google. Many have speculated that this was the main driver of the deal and was Microsoft's way of solidifying its ground in the mobile industry.
However, acquiring Nokia didn't change the harsh reality that Windows phones have only a 3% market share. Very few people loved the phones, and Android phones held a 79% market share. A couple of years after this deal, Microsoft wrote off $7.6 billion and had to lay off approximately 25,000 employees.
At Home Corp. and Excite.com (6.7 Billion)
In 1999, At Home Corp. merged with Excite.com for $6.7 billion. Excite Inc. was the internet's sixth most heavily trafficked site, and At Home Corporation was a high-speed Internet service aimed at cable television subscribers. The combined company was to be called Excite@Home.
Excite believed the merger would help it tap into new audiences through At Home's eighteen cable television partners. At Home executives said Excite's experience with programming interactive, personalized Web content would help them market their service to new customers and attract new advertisers to develop a loyal audience.
The goals didn't come to fruition and became a massive failure. In part, it was a culture clash. The web people didn't understand the broadband world, the broadband people didn't understand web content, and neither of them cared about cable.
Also, Excite@Home wanted to grow too big and too fast, and purchased a variety of online media properties to build an AOL-style empire. This deal led them to other poor acquisitions and a loss of hundreds of millions of dollars.
Just after two years after the acquisition, Excite@Home filed for bankruptcy in October 2001 and sold all its network assets to AT&T.
eBay and Skype ($2.6 Billion)
eBay Inc. acquired Skype Technologies for $2.6 billion in September of 2005. This transaction was a massive overpayment considering Skype's revenues were only $7 million. However, eBay CEO, Meg Whitman, justified the acquisition by claiming that Skype would improve the auction site by giving its users a better platform for communicating.
The optimistic CEO projected an increase in eBay's transaction volume by making it easier for buyers and sellers to talk using Skype's technology. But what she didn't realize was that buyers liked the anonymity.
eBay's users ultimately rejected Skype's technology and considered it unnecessary for conducting auctions. Two years after the acquisition, eBay informed its shareholders that it would write down the value of Skype by $900 million.
The entire deal rationale had vanished, and there was no way to create synergies that would justify the price tag of the transaction.
However, unlike the other transactions in this list, this deal was not a total disaster. In May of 2011, eBay was able to sell all of Skype's equity to Microsoft for $8.5 Billion. Due to eBay's 30% stake at the time of sale, the company realized a net gain of $1.4 billion on its original investment in Skype.
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