Why is synergy so difficult in mergers of related businesses?

Abstract

PurposeWhen a merger or an acquisition fails, usually integration problems or overpayment gets the blame. The authors illustrate that a common cause of failure is the traditional notion of synergy that exacerbates the overpayment and integration problems. This synergy usually leads to the failure of many mergers, yet synergy remains one of the most common justifications that management uses to shareholders.Design/methodology/approachThe main methodology is the author's interview of the CEOs of many successful acquiring firms as well as case studies of unsuccessful firms (some based on secondary sources). This methodology is complemented by academic research on these topics dating back to the early 1980s that had raised caution signals but were largely ignored.FindingsThe key finding is that it is very difficult to evaluate the nature of synergies, especially revenue synergies, during merger negotiations. This leads to overpayment and unanticipated integration problems.Research limitations/implicationsSuggested implications are to conduct in‐depth case studies that can follow the process in real‐time (fly on the wall approach).Practical implicationThe practical implication is to discount any revenue synergies more heavily than you may be inclined to do. Alert managers to the problem of justifying an acquisition or a merger based on the synergy rationale. Invest in getting to know the target – possibly years in advance.Originality/valueThe value is to alert managers considering related mergers to some potential landmines and what to do about them.