Companies must scrutinise partner before merger decision

Dubai: Companies should consider their partners carefully if they resort to mergers to weather the impact of the global financial crisis, global strategic consulting firm A.T. Kearney said.

According to A.T. Kearney, the GCC may witness an unprecedented wave of mergers as the financial crisis unfolds but a recent study found that most mergers destroy value and weaken the merger candidates instead of improving business and resulting in more profitable and stronger companies.

"Important to say that any merger is risky. Many fail to achieve the original goal. Historically mergers in the UAE were driven by a need for growth," said Dr Dirk Buchta, partner and managing director, A.T. Kearney Middle East.

"Like in any good marriage that is expected not only to last, but to produce many children, when considering a merger, company boards need to know why they want to merge and choose their merger partner carefully. One plus one does not automatically equal three. Almost 70 per cent of all mergers go horribly wrong. Nothing is worse than merging with the wrong partner."

Small businesses

He said he expected mergers would start occurring but said they need to be done for the right reasons and liquidity problems did not constitute a good enough reason.

Raju Menon, managing partner of investment advisory firm, Morison Menon Chartered Accountants said he did not anticipate many mergers in the region as almost 90 per cent of the companies here were small and medium enterprises.

"Mergers are usually initiated by large organisations for strategic reasons... I don't expect many to occur in the smaller businesses," he said.

He too cautioned against mergers saying it would lead to unemployment.

"Every organisation and person in the country is socially bound not to create unemployment and mergers create unemployment as companies streamline their operations. It's not advisable."

The region has recently witnessed mergers in the banking and financing sector. According to Buchta, choosing the right partner is crucial.

"Size does not always matter, quite often it is the quality, not the quantity, that is important," said Buchta.

According to him, only 29 per cent of companies achieve an increase in profitability after a merger or acquisition, while 57 per cent underperform and in 14 per cent there is no change at all after a merger.

"Never merge a company in trouble, rather fix the problems first, and then merge a strong company. This is the best way to merger success," he said.