The combination of UFC and Strikeforce into one company may accelerate the growing popularity of mixed martial arts.
Ben Ahhi – UFC POSTER-fire – CC BY 2.0.
Despite the potential benefits of mergers and acquisitions, their financial results often are very disappointing. One study found that more than 60 percent of mergers and acquisitions erode shareholder wealth while fewer than one in six increases shareholder wealth (Henry, 2002). Some of these moves struggle because the cultures of the two companies cannot be meshed. This chapter’s opening vignette suggests that Disney and Pixar may be experiencing this problem. Other acquisitions fail because the buyer pays more for a target company than that company is worth and the buyer never earns back the premium it paid.
In the end, between 30 percent and 45 percent of mergers and acquisitions are undone, often at huge losses (Hitt, et. al., 2001). For example, Mattel purchased The Learning Company in 1999 for $3.6 billion and sold it a year later for $430 million—12 percent of the original purchase price. Similarly, Daimler-Benz bought Chrysler in 1998 for $37 billion. When the acquisition was undone in 2007, Daimler recouped only $1.5 billion worth of value—a mere 4 percent of what it paid. Thus executives need to be cautious when considering using horizontal integration.
• A concentration strategy involves trying to compete successfully within a single industry.
• Market penetration, market development, and product development are three methods to grow within an industry. Mergers and acquisitions are popular moves for executing a concentration strategy, but executives need to be cautious about horizontal integration because the results are often poor.
1. Suppose the president of your college or university decided to merge with or acquire another school. What schools would be good candidates for this horizontal integration move? Would the move be a success?
2. Given that so many mergers and acquisitions fail, why do you think that executives keep making horizontal integration moves?
3. Can you identify a struggling company that could benefit from market penetration, market development, or product development? What might you advise this company’s executives to do differently?