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Successful Mergers and Matchmaking

by

January 18, 2012

Synergy is a driver of M&A, but do synergies result in increased cash flows and new products? The answer is yes, if certain criteria are met, according to an Insead article. Recent research found that
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mergers were most successful and resulted in improved profit margins, when a firm merged with a target that was similar to itself, but different enough from its rivals to differentiate its product offerings.”
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The measure of similarity is the “relatedness” of the two companies. What is remarkable about this research is that it analyzes text provided in SEC 10K filings and runs it through a kind of matching platform.  Apparently, if companies use similar words to describe themselves, then chances are it is a good match.

 

The professor responsible for the research says that the researchers use a similar technologies to those that underlie Match.com, an online dating platform, and Facebook, social networking. “In Match.com, the software can suggest potential good matches based on similarities of interest and similarities of words that individuals use to describe themselves.”

 

Companies are then classified into “relatedness clusters” just like a Facebook circle of “friends. We build variable industry clusters which can then capture how firms are related to each other and which firms share enough words to be classified as producing in the same industry…. Similarity in product descriptions is based on 10K filings at the Securities and Exchange Commission.

 

“What we are attempting to capture is whether there is sufficient complementarity in firms to make their merger or acquisition a success but enough differences from potential rival firms so that rival firms cannot replicate the benefits of the merger.”

 

The article provides two examples of successful mergers that generated greater cash flow and new products, the Disney-Pixar merger and the General Dynamics-Antheon merger. The method however does not go as far as saying it can make the outcome of M&A predictable “Failure may be the result of intangible or human factors we cannot measure. Mergers can be viewed like R&D which often times is not successful. However the gains from success can be substantial and firms may also lose if they do nothing and do not attempt to introduce new products both through M&A and also through R&D.” Image Source: Pixar Blog

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