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Advisors, Private Equity

4 Deals That Failed and Why

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After tireless months of courtship, meetings, negotiations, due diligence, and approvals, why are so many deals still at risk of failing post-close?

According to Robert Sher, founder of advisory firm CEO to CEO, the probability of success for most mergers is at 50 percent — or about as high as a coin toss.

That’s not an assuring metric, given the time and scrupulous energy sunk into the deal-structuring process.

Unfortunately, those at the negotiation table are also rarely the ones rolling out the nitty-gritty of synergistic initiatives. High-minded thinking, overzealous investment bankers, and out-of-touch executives simply can’t compensate for solid post-merger execution and strategic leadership; somewhere down the line the goodwill message of partnership gets lost in turf wars and arrogant culture clashes.

In deal-structuring, the financials are certainly important, but mergers also fail due to intangibles of consumer and workforce behaviors such as cooperation, allocation of bandwidth, streamlining operations and technologies, target markets, and customer profiles. (For more, see this article for the top metrics and non-financials to consider before deal-making.)

“The consequences of a bad deal are far greater for a mid-market company than for a big corporation,” says Sher. “Large companies usually have enough managers and resources to patch things up. Most mid-market companies lack the finances or bandwidth to absorb a bad deal.”

Consider these four failed mergers as learning examples.

eBay/Skype

Culprit: Customer profiles, culture clashes

In 2005, eBay bought Skype for $2.6 billion. The deal was troubled from the start, as eBay misunderstood its entire customer base. Buyers, sellers, and third-parties were just fine messaging each other through its platform under the guise of user names and storefronts. When the company envisioned them discussing products via Skype, it completely missed the mark.

According to a PC Magazine report, a culture clash between the two companies was also too great to overcome. “EBay’s conservative, bank-like culture didn’t mesh well with Skype’s democratic mission to level the field for voice technologies. Skype’s management changes during its four-year partnership also didn’t help matters.” Eventually, eBay sold Skype for $1.6 billion.

Sprint/Nextel

Culprit: Operations and technologies, customer profiles, target market, culture clashes

In 2005, Sprint purchased Nextel for $35 billion in majority shares. Problems arose from the start. There were cultural differences — Sprint was bureaucratic; Nextel was entrepreneurial. Widespread distrust manifested between company leaders. Disparate reputations didn’t help matters: Sprint’s customer service was horrendous while Nextel’s was more attuned to customer concerns.

Poor coordination across post-deal operations saw both companies wastefully maintaining separate headquarters. Their combined technologies didn’t mesh, either. Nextel’s walkie-talkie aesthetic was out of sync with Sprint’s mainstream phone models. By 2013, Sprint got rid of Nextel’s network entirely.

Arby’s/Wendy’s

Culprit: Target market

In 2008, Arby’s acquired Wendy’s for $2.3 billion hoping the latter’s brand could bolster the former’s, but things just didn’t work out. There were already almost double the number of Wendy’s (6,600) than Arby’s (3,600) franchises, and Wendy’s accounted for 70 percent of revenues, while Arby’s continued performing poorly. In the end, the combined group sold 81.5 percent of Arby’s shares for $430 million to focus primarily on further developing the Wendy’s brand.

AOL/Time Warner

Culprit: Culture clashes, operations and technologies

In 2001, AOL acquired Time Warner in a mega $165 billion deal. AOL wanted access to content and cable networks to evolve its dial-up technologies, and Time Warner wanted an internet presence. Chaos ensued in the months following as the dot-com bubble burst, forcing a $99 billion goodwill write-off of the AOL division.

Making matters worse, Time Warner developed its own Road Runner internet service instead of marketing and evolving AOL, and they bumped heads on converging their mass media and content outlets. In 2003, digging the knife deeper in the wound, and as a sign of lingering internal strife, Time Warner dropped AOL from the official company name.

With so many deals failing due to the “non-financials,” mid-market companies should take heed of obvious red flags as seen from catastrophic mergers. When at the deal table, executives should consider the customers affected, as well as their vision for whether a merger makes sense and how their workforce can play  nicely together.

Want more stories of mergers gone wrong? Look here.

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