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Why do firms carry out mergers and acquisitions, and how can the difficulties involved be overcome?
In October this year, the British government approved a merger between two major television companies, Carlton and Granada. The £4 billion deal, which creates a single ITV company for the whole of England and Wales, was welcomed enthusiastically both by investors and by the managers of the two troubled companies , who have steadily lost audience share and advertising revenue to new rivals such as BSkyB, and lost money following the collapse of their ITV Digital venture. However, it remains to be seen whether the new partnership will succeed in turning around the companies' fortunes, or whether, like many past corporate marriages, it will end in unhappiness and divorce.
The merging of two companies into one is not a recent idea - there were "waves" of corporate mergers back in the 1920s, the 1960s and the 1980s (Fairburn and Kay 1989) - but the enormous scale on which companies have swallowed each other up over the past decade far exceeds what has gone before. The total worldwide value of mergers and acquisitions in 1998 alone was $2.4 trillion, up by 50% from the previous year. However, research suggests that a large proportion of mergers and acquisitions do more harm than good to companies and their shareholders: Mercer Management Consulting (1997) concluded that "an alarming 48% of mergers underperform their industry after three years" , and Business Week recently reported that in 61% of acquisitions "buyers destroyed their own shareholders' wealth".
Why do so many firms choose to participate in mergers and acquisitions, and why do so many of these subsequently go wrong? In this essay, I will ...