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5 Epic M&A Fails

They gambled and lost in the high-stakes mergers & acquisitions game. By Timothy Inklebarger | Summer 2016

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An emotional purchase, a botched integration, a lack of cultural synthesis—a million things can go wrong when two entities join forces, especially when buying a company that was rotten to begin with. The worst purchases can mean billions in losses and even bankruptcy. In fact, 70 to 90 percent of M&A deals fail to ever hit their revenue targets, according to Harvard Business Review.

Perhaps that’s why deal-making has cooled in 2016, down 17 percent from the same period last year, says Takashi Toyokawa, senior editor for Mergermarket and Dealreporter, which provide M&A news and analysis. Nevertheless, even with a dip there’s still plenty of megadeals on the horizon—the $130B “merger of equals” is still in negotiation between Dow Chemical and Dupont, for example, and Charter Communications recently undertook the $71B acquisition of Time Warner Cable. Which means the next epic M&A catastrophe could be in the making. And when the mighty fall, they fall hard (do Bank of America and Countrywide Financial, and AOL and Time Warner ring a bell?).

Considering every economic sector has its own pitfalls, failure is often easier than it looks, Toyokawa explains, noting that fluctuating commodities prices can spell disaster in the energy sector, and pharmaceutical and tech sector deals often hinge on the perceived value of future returns.

Whatever the sector, and whatever the pitfalls, commonalities in misjudgment remain, most notably insensitivity towards company cultures, failure to develop a solid integration model, and an inability to slow or halt deals once momentum begins.

To illustrate the point in bright neon colors, here we highlight five of the worst M&As in recent memory.

ONE: Bank of America/Countrywide

Bank of America’s purchase of Countrywide Financial for $2.5B in 2008 is often touted as the worst acquisition in history. The deal aimed at making the bank the largest mortgage lender in the country resulted in more than $100B in write-downs, legal settlements and other losses.

Closing the deal a little over two months prior to the 2008 financial crisis, Bank of America was considered a “white knight” for the troubled subprime mortgage lender. But even when plans for the purchase were first announced in January 2008, industry analysts warned that taking ownership of toxic home loans was a high-risk proposition. Analysts have pointed to Bank of America chief executive Ken Lewis’ cozy relationship with Angelo Mozilo, former chairman of the board and CEO of Countrywide Financial,  as among the reasons for the company’s unwillingness to put the brakes on what some saw as a bad deal from the start.

Countrywide wasn’t the only one with problems—Bank of America and its subsidiary Merrill Lynch also had subprime loans on the books—but Countrywide held the vast majority of the new corporate entity’s bad assets when the world economy came crashing to a halt. Bank of America ultimately agreed to pay $9.3B—$6.3B in cash and $3.2B in securities—to the Federal Housing Finance Agency to settle allegations that it had sold bad mortgage securities to Fannie May and Freddie Mac. Mozilo ended up paying $67.5M to settle a civil fraud case with the SEC in 2010. The SEC also banned him for life from ever serving as a director or officer with any publicly traded company.

TWO: Wachovia/Golden West Financial

While Bank of America took a massive hit from which it is still recovering, the failed acquisition was better than Wachovia Bank’s untimely $25.5B purchase of Golden West Financial at the peak of the 2006 housing market, says Ken Thomas, a Miami-based independent banking consultant and president of Community Development Fund Advisors. “When you buy a bank that puts you under, that’s a lot different than when you buy a bank that cripples you,” Thomas explains of the deal, which finalized in 2008. “No matter how many losses you had at Countrywide, they weren’t as big as Wachovia’s because it brought the bank down.”

Adjustable-rate mortgages were the main culprit in Wachovia’s precipitous market decline and ultimately resulted in a $15.4B merger with Wells Fargo. The so-called “pick-and-payment” options allowed borrowers to choose the adjustable-rate mortgages that contributed to the tidal wave of foreclosures defining the financial crisis. “This deal caused the fourth largest bank in America to fail,” Thomas states plainly.  

THREE: HP/Autonomy

Though M&A deals can be a tough landscape to traverse, the inability to see the warning signs hiding in plain sight guarantees epic failure. Like watching a train wreck in slow motion, emotion sometimes takes over and not even the best advice can stop a deal once it gains momentum.

Case in point is Hewlett-Packard’s (HP) $11B purchase of British software company Autonomy in 2011. A year later, after discovering what it claimed were accounting improprieties with Autonomy, HP announced it was writing down $8.8B in losses. The company accused Autonomy’s management team of inflating its value in “a willful effort to mislead investors and potential buyers, and severely impacted HP management’s ability to fairly value Autonomy at the time of the deal,” according to a 2012 press statement. Angry investors would later sue HP, arguing the company knew of fundamental shortcomings at Autonomy but did nothing to stop the acquisition.

Dan Avery, a principal in national management consulting and venture investment firm Point B’s M&A practice, cautions that companies need to recognize “deal fever.” “Bad buys can grow out of a previous business relationship, a pet project or a flawed idea that gets momentum,” he says. “Then it becomes a self-fulfilling prophecy, and buyers ignore red flags. They get far enough along that they feel they have to go through with it. Caution gets drowned out.”

The lesson? “A questionable acquisition strategy can be overcome by a good integration strategy,” says Avery.

FOUR: AOL/Time Warner

Sometimes deals just never live up to expectations. Other times a failed integration can make the best looking deals fall apart overnight.

In 2000, AOL and Time Warner made a catastrophic attempt to merge virtual media and Internet to create the world’s largest media company. In essence, this was a culture-changing purchase from which there was no returning. “If you’re evolving or transforming your business with an acquisition, it’s likely a new and different culture will be part of the deal. You’ve got to check your ego at the door and be ready to change, too,” Avery warns.
In this case, a clash of cultures between employees of the two companies surfaced during their integration, explains a Fortune Magazine postmortem on the 15th anniversary of the failed deal. With the tech bubble adding fuel to the fire, the company posted a stunning $99B loss just two years later.

Avery advises companies to put integration risks front and center and to consider the impact a merger will have on their respective cultures. He and co-author Otto Ramos wrote in 2013 that integration risks “can range from business disruption to loss of customers and key employees, culture clash, productivity declines and delays in realizing synergies.” Identifying culture gaps is key to a smooth integration strategy, he writes. Sometimes, he tells me, operating companies separately makes the most sense.

FIVE: Peabody Energy/McArthur Coal

Similar to Bank of America’s and Wachovia’s acquisitions at the height of the housing boom and AOL’s merger with Time Warner during the fat and happy days of the tech bubble, Peabody Energy paid a pretty penny—about $4.9B—for Macarthur Coal when coal prices were soaring in 2011. Toyokawa explains that it was seen as a great deal at the time, “But the headline price tag was very big.”

Substantial demand from China and other emerging markets like India were fueling the demand for coal, he says. “That demand has substantially diminished between then and now. A lot of that in the US has to do with federal regulations limiting the amount of coal that can be produced. That’s a classic case that falls into commodities,” Toyokawa explains.

Former Macarthur Coal Chairman Keith De Lacy acknowledged in a 2015 interview with the Sydney Morning Herald that the mining company probably paid too much at “the peak of the boom.”

With every boom there is likely to be a bust. Learning from past blunders will hopefully up the chances of future glory for the (majority of) mergers and acquisitions to come.