Study Shows Cross-Border Mergers Not Always a Good Thing

KPMG says international mergers do not necessarily enhance equity performance of the combined firms.
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LONDON -- Although

Bank of Scotland

shareholders are likely to face the ignominy of watching the bank fail yet again in a corporate venture, they may take some comfort from a report released today by accountants



KPMG looked at the premerger and postmerger equity performance of the top-700 cross-border deals, by value, between 1996 and 1998 and found that only 17% of deals had added value to the combined company, while 30% produced no discernible difference and as many as 53% actually destroyed value. Unsurprisingly, the survey found that management thought differently: 82% of respondents believed the deal in which they had been involved was a success, even though less than half carried out any formal review process.

"In other words, 83% of mergers were unsuccessful in producing any business benefit as regards shareholder value," KPMG says.

These are strong words indeed, especially coming as they do from an organization that makes money from giving M&A advice. Not wishing to bite the hand that feeds it, KPMG stresses it did not set out to prove that mergers were bad for business, but rather to focus on understanding what some companies are getting right and apply these findings to future mergers.

KPMG identified six of what it rather originally referred to as "keys to success." Three of these focused on activities that directly impact financial performance -- synergy evaluation, integration project planning and due diligence. The other three issues related to people aspects -- selecting the management team, resolving cultural issues and communications.

The survey found that only nine companies in the survey (less than 10% of respondents) addressed all of the people aspects and carried out integration project planning. In all nine cases the mergers were successful.

The survey also showed the cultural challenges companies must address in cross-border mergers. Deals involving a U.K. and U.S. company were 32% more likely than average to be successful, while combinations of U.K. and continental European firms were only 19% more likely than average to be successful. Mergers between U.S. and continental European firms were 11% less likely than average to be successful.