When companies opt for a merger or acquisition, the hope that they will enjoy benefits like larger market share, diversification of products and services, and increase in plant capacity.
However, many times executives face major problems after the deal is made. These include cultural clashes, different systems and processes, decline in shareholder’s value etc. Here are few deals of the 20th century, which backfired.
eBay‘s Acquisition of Skype
eBay–the site known for its online auctions, in the year 2005, bought Skype Technologies, an internet telephone startup for a whopping $2.6 billion, with a hope that online buyers would prefer PC-based voice calls to online auctions, thereby boosting communications and adding value to the company’s core operations.
But the customer’s reaction was totally opposite to what eBay had expected–eBay was a good online auction site, but nobody on eBay wanted to talk. For four years eBay tried its best to put its hyped propitious-acquisition to use, but had to end up selling Skype to private investors for a loss, for $1.9 billion. Skype was acquired by Microsoft in May 2011 for a staggering $8.5 billion.
Sprint and NEXTEL
In 2004, Sprint and NEXTEL announced their merger to form Sprint NEXTEL Corporation–in a hope to catch up with Verizon and AT&T, but due to tax reasons, the deal was transacted as purchase of NEXTEL communications by Sprint (Sprint purchased 50.1 percent of NEXTEL.) Both the companies had to face opposition to the merger from regional affiliates, who felt that the new company would violate non-compete agreements which the former companies had with the affiliates.
As happens during a merger, problems started creeping in, with the top NEXTEL executives leaving the company after the closure of the merger, and only a handful of key NEXTEL executives remained two years after the merger. Many former NEXTEL middle and upper-level managers cites numerous reasons including cultural differences for leaving the new company.
Between 2008 and 2009, there were thousands of layoffs, losses worth billions, and plummeting in the value of the company’s stocks. In 2008, the company wrote down $29.7 billion of the $36 billion Sprint had paid to NEXTEL in 2005, which reflected the depreciation in NEXTEL’s goodwill since the date of the acquisition.
Lucent and Alcatel
It was rumored that Lucent’s strength in wireless business would compliment Alcatel’s global footprint and its prowess in fixed-line and broadband. Facing intense competition, the two decided to partner and form Alcatel-Lucent in 2006.
But it couldn’t have been easy for either of the two, since Lucent–an offspring of the AT&T monopoly, it retained a common-and-control style–was hierarchical and centrally controlled; while Alcatel was entrepreneurial and flexible.
Since the merger, the deal has yielded malevolence, lost billions and is a threat to Pat Russo’s future as the CEO. Major cultural differences made this merger a disaster, Alcatel being a French company and Lucent being an American company, differences in time, language, and management styles, put this marriage between these tech giants into trouble since day one.
The $27.5 billion company has posted six quarterly losses and has more than $4.5 billion in writedowns. Also, the stocks have plummeted by around 50 percent. The company has reported a net loss of $554 million in 2010. Adding on to the current misery is the threat from Huawei (which has picked up its key customer Britain’s BT) in its traditionally strong fixed-broadband business.
AOL and Time Warner
The $360 billion merger, announced in January 2000, is one of the most significant corporate failures of the 20th century. Time Warner’s video, music and print, and its cable company would have rallied around AOL as the solution (making AOL synonymous with a national broadband network.)
Within months, the dot-com bubble left investors with billions in losses. Time Warner took up a dial-service just when Web surfers were switching to high-speed in masses. The companies found that it was more important to build a great platform which everyone would enjoy using–than to own–the content that would be distributed over it.
The value of AOL has dropped significantly from its $360 high. Its subscriber base has seen no significant growth since 2002. In September 2008, Time Warner CEO Jeff Bewkes announced that Time Warner would split AOL’s internet access and advertising businesses into two, with the possibility of later selling the internet access division.
The reason for the failure is the fact that AOL and Time Warner were not able to encourage a climate within the companies to initiate the synergies that were proposed. A clear and concise strategy never emerged from the two companies. The two companies always seemed out of sync, witnessing massive job losses, dramatic departures of the executives and plummeting prices of the stocks.
In 2009, Time Warner finally set-off AOL, as an independent company. Today the combined values of the companies is about one-seventh of their worth in 2000. The merger destroyed more investor value than any single merger in the history.
News Corp and MySpace
At the time of its acquisition in 2005 by News Corp., MySpace was the leading social networking site, which could drive its traffic to News Corp. After the deal, it stopped innovating–becoming just another property in the Murdoch domain, while Facebook and Twitter continually launched new features to improve social-networking experience.
The deal required MySpace to place even more ads to its already heavily advertised space, making the site slow, less flexible, and difficult to use. MySpace couldn’t experiment on its own, without forfeiting revenue, while Facebook was rolling out a new, clean site design. MySpace built everything in-house and was not deep enough in its product offering.
In 2009, MySpace underwent layoffs and management shakeups, and the users disliked interface tweaks. In June 2011, News Corp has sold off MySpace for $35 Million, far less than the $580 million News Corp paid for MySpace in 2005.
AOL and TechCrunch
In September 2010, at the San Francisco TechCrunch Disrupt Conference, AOL signed an agreement to acquire TechCrunch for $30 million, in order to further its overall strategy of providing premier online content.
The announcement would bolster AOL’s position as one of the world’s leading providers of high-quality, tech-oriented content. TechCrunch on the other hand was finding it hard to find talented engineers who wanted to work and how to keep them happy. AOL which runs the biggest blogging network in the world could fix the problem, and TechCrunch could focus on their engineering resources on higher end things.
Since the beginning AOL was aggressive about an important issue-the editorial. AOL allowed TechCrunch to freely criticize it, when they thought that AOL deserved the criticism. AOL had promised to give TechCrunch complete editorial independence, which the TechCrunch employees didn’t feel. Huffington had informed Arrington (founder of TechCrunch) that he would be an unpaid contributor rather than a paid writer, while AOL informed Arrington that he was no longer an AOL employee (he was also told that he would be an employee in the AOL Ventures division).
TechCrunch has proposed two options-reaffirmation of the editorial independence promised, i.e., autonomy from the Huffington Post and a blanket right to editorial self determination; or sell TechCrunch back to the original shareholder.