Why Most Mergers Fail

At the IIMs, campus recruitment happens through something known as the slotting system. Slot zero has the highest paying jobs, with the most (alleged) prestige attached to them. This slot typically attracts consultancies, commodity trading desks, and importantly for the purposes of this post- investement banks.

As the investment banks have first crack at us, they typically pick the people with the highest grades, the most impressive work experience and extra curricular activities, and the best analytical skills that their interview techniques pick up. The sort of people you’d expect were the smartest of the lot.

All well and good. Slot zero ends, and the smartest people take up jobs with investment banks. Slot one begins, with the people who are arguably less smart.

Now, here’s the interesting part. Guess who shows up in Slot one. The India-based offshore centres of the investment banks, who hire people for the back office work that investment banks need: rating securities, coming up with valuations for companies, and generally telling the investment banks whether they should be long or short on a particular deal.

Now this is where it gets interesting: the smart people at the investment banks who make a particular deal have to rely on the supposedly less smart people at the back office to provide them with information to help them make a decision on that deal. The guy at the back office, being less smart, is more likely to get the valuation wrong. Using this wrong information, the smarter guy goes ahead and makes the deal, and the deal fails spectacularly.

You know, this just might explain the fate of the AOL-Time Warner merger, the HP-Compaq merger, and so many other mergers in the history of corporate finance.

10 Responses to Why Most Mergers Fail

  1. SKimpy says:

    Good stuff da. But i’m not so sure the ibankers rely SO much on the back office. I mean, I know for a fact that valuation (for large deals) is done by associates and analysts. The guys in the back office just do equity analysis, etc.

  2. Shiju says:

    pardon me if i find your theory a lil bit amusing, but you assume
    a) the smartest people want to be ibankers
    b) those who want to any other kind of job are not ibankers
    c) the goal of all smart people is to earn the most money and therefore get day 0 jobs

    to say nothing about the affinity for or talent for a particular less glorious function such as as say – hr (ha, ha) not that i have a great deal of love for hr people..

    i guess b is not as cool as it used to be..

  3. Shiju says:

    correct point b) above to read as below:

    b)those who want any other kind of jobs are not smart or as smart as the i-banking public

  4. Yes, I have streteched my assumptions a bit to make this look nice and elegant. I’ve also used ‘smart’ as a proxy for ‘with good gradse and presumably excellent quantitative skills’. A lot of smart people this year aren’t applying to I-banks, my esteemed guest blogger being one of them.

  5. shiju says:

    one of my batchmates pointed me to your post

    and he was of the opinion that there is no point in leaving a commment.

    sadly, your response proves him right.

    I hope others at b are not like this, and hopefully some people still play tsepak..

  6. What does tsepak have to do with this? And why is there no point in leaving a comment? I’m mystified as to why my response makes your comment worthless in any way.

  7. Karthik says:

    Hi Aadisht,

    There is a lot of difference between the kind of work that gets outsourced and the kind of research that goes into M&A. The latter is done by the brighter kids that are taken on day zero. And a considerable amount of cross checks are performed by senior folks, before they the action begins.
    As for the failed mergers, its more because of people issues rather than valuation issues. Because in the end business is all about people. Hence HR might not be that bad an option after all 🙂


  8. Karthik saar, you have proved me wrong. You did so politely, provided facts relevant to the topic, and didn’t indulge in snide remarks. You rock.

    I think the reasons most of us have cribs with HR is that the information assymetry of HR as a function is much greater than for finance or marketing or operations. We can intuitively understand that a supply chain has to be built, or that a business needs capital (well, perhaps less intuitively when it comes to finance), but it’s much more difficult to understand the importance of people management unless you’re actually an HR practitioner or a staff manager. For freshies and people on the line, it’s just an intrusion into their time.

  9. Kaps says:

    One of the factors that drives placements is the business cycle. During a boom year, let’s say 20% of the batch gets into I-Banking. During a slowdown only 10% of the batch might make it to I-Banking. The other 10% during the slack year might have joined BPO of I-banks or might take up some other finance jobs. For no fault of theirs, these people had to enter the BPO industry. So one should not conclude that mergers fall bcoz of this reason. The BPO’s do consist of people who might have otherwise got into the top tier I-Banks.

  10. surya says:

    Lets look at downturn cycles, I remember in 01 when newspaper reports were full of red , I-bankers on the road. Still, I would love to be in PE or VC or I-banking in that order neccesarily:). Game theory or Gambling ? Next downturn is predicted in 07 in tech consulting n rest will follow. If theory holds that flux is faster in tech and then percolates to brick n mortar. There was a positive co-relation last time in 01. K to the point Org theory is as important as the beancounters to know where org is in S curve differentially d/dx growth , what’s the culture (Organic Gaia type for services or mechanistic)

Leave a Reply to SKimpy Cancel reply