When corporate mergers are contested i.e. there are two competing suitors for a target company and there is a bidding war, the loser actually wins says recent research according to Stephen Gandel in CNN Money. That's because the bidder organization that lost did not have to deal with making the merger work, the execution challenge faced by the successful acquirer. But first more on the rather interesting research.
The article "Winning by Losing- Evidence on the Long Run Effects of Mergers" by Ulrike Malmendier,Enrico Moretti and Florian Peters studies mergers between 1985 to 2009 where the merger happened after a bidding war. Time was the big difference between contested acquisitions, the subject of their study, and single bid acquisitions. When the bidding was by one company for another it took only 65 days to conclude the deal and when there were offers and competing offers in contested bids time expanded to 9.5 months. Both suitors before the merger had similar performance but post-merger the winning bidder firm lost out by as much as 50% when compared to the rival firm that had lost the bidding war for the acquisition.
So why does this happen? A 50% difference in performance when the merger should have created an unstoppable juggernaut? While the authors give some pointers the bottom line is that on paper and in theory mergers look perfect - before the merger. It is as if the strategy textbook has come alive and that MBA case study all the executives had done in graduate school seems to have taken wings. The realities, however, of getting two sets of the entire value chain to work together is a huge challenge. There are two sets of distributors, advertising agencies, suppliers , let alone employees. Just the complexity of combining organizations and their complex networks of suppliers and distributors is a daunting long-drawn task.
In contrast, the losing firm probably sulks for a while, but just does not have this huge change in its ecosystem. It has the same distributors, agencies,suppliers and most importantly- employees. That is why perhaps, after a few years finds itself much ahead of the rival in performance. Contact StratoServe.