When considering a merger or acquisition, there will always be a certain amount of speculation involved. However, with enough research into markets, trends, and revenue streams, and the use of valuation services, companies can take a great deal of the guesswork out of any venture and make a sound investment.
The alternative is not pretty, and can cost your company thousands, millions, or even billions of dollars, or perhaps bankrupt you. Here are some of the worst-case scenarios that Appraisal Economics seeks to help companies avoid.
1. AOL & Time Warner – No such list is complete without mentioning the colossal failure of the AOL-Time Warner merger. The timing could not have been worse: The deal went through for just over $160 billion in 2000, but the dot.com bubble burst not long afterward and, when combined with a decline in the popularity of dial-up and clashing corporate ideals, spelled disaster for the newly merged company. The two companies have since gone their separate ways.
2. Quaker Oats & Snapple – This is the sort of story that particularly emphasizes the role that research and planning have to play in M&A. First and foremost, Quaker paid $1.7 billion for Snapple, an amount that was deemed to be about $1 billion too high by market experts. Secondly, they failed to recognize that the market for their new line of products was significantly different from what they had anticipated. They were hoping to tempt larger retailers like supermarkets and franchise restaurants with Snapple products, when the largest market was actually small retailers like convenience stores. This gross miscalculation led to Quaker selling the company for $300 million after only a little more than two years.
3. eBay & Skype – When eBay bought Skype in 2005 for $2.6 billion, they thought that adding a video chat option to the service would enhance communications between buyers and sellers. As it happened, eBay users were pretty happy just keeping things simple, and did not see a particular need for extras like Skype. When the option never caught on as intended, eBay sold Skype in 2009 for a loss of $700 million.
4. New York Central & Pennsylvania Railroad – This 1968 train wreck of a merger was intended to help both companies reduce costs in a changing industry landscape that was starting to heavily favor air and highway travel. However, the newly-formed Penn Central could not turn a profit and just two years after the initial deal, the company announced that it was filing for bankruptcy. Several factors potentially influenced this outcome aside from the changing market, including regulations preventing customer-facing rate adjustments and corporate cultures that had been at odds when they were rivals.
These are just some of the best examples of why an analysis of current markets and their trajectories is not only ideal, but necessary before any merger or acquisition. Appraisal Economics can do a thorough review of the companies involved in a potential deal and help determine the appropriate sale or purchase price. Contact us today!