Compare and Contrast Mergers and Acquisitions Failures

Solution Preview

A. In your paper, discuss the reasons why an M&A fails (technical and legal insolvency, and bankruptcy).

According to Dun & Bradstreet (1997), the leading causes of business failure in order of priority include recession, excessive operating expenses and leverage, and management inexperience. Mismanagement occurs then there is an unwise over-expansion, or an unsound financial action or perhaps a poor marketing plan, ineffective sales force and high production costs also affect the firm negatively in terms of financial aspect. Technical insolvency happens when firms are unable to meet liabilities when they are due but when a firm's liabilities exceed the market value of assets, there is legal insolvency. Bankruptcy is a federal legal proceeding to reorganize or liquidate the firm's assets or operations and it is designed to protect the technically or legally insolvent firm from lawsuits by its creditors pending the decision to shut down or to continue to operate the firm. It is considered to be bankrupt when its creditors file a petition for reorganization or liquidation with the federal bankruptcy courts.

B. Once the failure of an M&A occurs, what happens to the assets of both companies? In your paper be sure to consider what happens to the stakeholders, image of the company, price per share, market share, company assets, and position in the industry, goodwill, and service capability within the industry.

Some companies sell their assets to the highest bidder after a failure of M&A which results in liquidation. This usually happens when the merged company cannot pay its creditors.

An M&A failure can be damaging across all stakeholders, e.g., investors, employees, suppliers and the general public. Reputations can be severely tarnished in front of the public and image is negatively affected. The usual causes of the failure are greed and mismanagement.

A recent study on The Success of Acquisitions: Evidence from Divestitures by Kaplan, S. and Weisbach, M. showed results suggesting that market reactions to acquisition announcements reflect expectations of future profits and unprofitable acquisitions are recognized as such when initiated. It is four times likely that diversifying acquisitions are to be divested than related acquisitions. However the research did not find any strong evidence that diversifying acquisitions were less successful than the related ones.

In another study by Stuart Rosenstein on Corporate Combinations or Failed Acquisition Attempts, firms with widely dispersed share ownership, the corporate control is in management's hands but a blockholder may have some measure of control if he/she has ownership of a relatively small block of ...