GREENVILLE, S.C.—As Kenny Rogers famously sang, “You’ve got to know when to hold ‘em/and know when to fold ‘em.” That lesson certainly applies to the world of mergers and acquisitions. While merging often makes business sense, not every merger is a good deal.
Womble Bond Dickinson attorney Melinda Davis Lux explores this topic in a new article for Chief Executive magazine titled “Knowing When Not To Pursue A Merger”. Davis Lux has negotiated and structured many M&A deals on behalf of corporate clients, and through her experienced, has learned that certain factors must be in aligned to ensure a successful combination.
“Even if the market, the industry, and the economy are absolutely perfect for the merger, if two companies merge with any one of the following three principles against them, I can usually predict failure,” Davis Lux writes.
These three principles are:
- If the cultures of the two companies are substantively different;
- If a company is flush with cash but has not yet developed a well-defined acquisition strategy and robust corporate development capabilities. In other words, don’t get drawn in by a “do something” mentality—mergers must meet a larger strategic goal; and
- If a company’s leadership is struggling with a serious internal issue—one that the company’s leadership has put off dealing with—and they now think that a merger with a larger, healthy company that will “fix” the problem is the answer, they’re wrong.
Davis Lux points to the 1968 merger of the New York Central and Pennsylvania Railroads as a textbook case of a merger that shouldn’t have happened. The deal created the sixth-largest corporation in the US, but just two years later, the newly merged company, Penn Central, became the largest bankruptcy filing in the nation’s history.
Melinda Davis Lux focuses her practice on complex business deals, including mergers and acquisitions, joint ventures, and financing transactions. She also advises public companies, directors, and stockholders with respect to securities law and corporate governance matters, including SEC reporting requirements.