Mergers and acquisitions can be a strategic way to increase the value of your company, but it is a detailed process that requires proper planning and execution. Not all M&A deals are profitable, whether that be due to poor planning or unforeseen circumstances. Looking at history can give us some insight towards the future. These five M & A failures may help guide your next transaction.

1) Quaker Oats and Snapple

Quaker Oats had amazing success with Gatorade– success they wanted to replicate. Despite Wall Street’s concerns that they were overpaying for Snapple by a whole $1 billion, Quaker Oats bought Snapple for $1.7 billion in 1993. In just over two years, Quaker Oats sold Snapple to a holding company for $300 million, meaning they lost $1.6 million every day they owned the drink company. 

While Quaker Oats succeeded with Gatorade, poor planning and incorrect marketing led to Snapple’s post-acquisition failure. Quaker Oats attempted to introduce Snapple to the supermarket industry, as they have had consistently held immense influence over it, but Snapple’s consumer base existed primarily in smaller channels such as gas stations and convenience stores. This clash, in conjunction with marketing created by a team not accustomed to Snapple’s audience, cost Quaker Oats greatly. 

2) Sprint and Nextel Communications

In late 2005, Sprint purchased $37.8 billion in Nextel stock, thereby earning a majority stake in the company. This merger created the third-largest telecommunications provider at the time, only behind AT&T and Verizon. Sprint had a history in the traditional consumer market, while Nextel had a large presence in the business sector. They hoped to merge their consumer base and continue to grow. 

Post-merger, numerous Nextel managers left the company due to cultural differences. Nextel was known for its great customer service, while Sprint was infamous for its service. Policies requiring Nextel employees to receive approval for corrective actions created an atmosphere lacking trust and rapport. Their customer service declined so significantly that customers began to leave. T-Mobile acquired Sprint Nextel in 2020, resulting in the discontinuation of Sprint.

3) eBay and Skype

In the same year, eBay CEO Meg Whitman had a vision for the future of eBay. A free integrated service that allowed users to talk via video call at the push of a button. This vision cost eBay $2.6 billion, a hefty investment when Skype was valuated at $900 million only two years later. While Whitman’s idea was not unfounded, a poor understanding of her consumers’ desires led to a poorly planned acquisition. 

eBay’s client base liked the platform's anonymity; they rejected the integration of Skype. The two companies simply did not synergize. Thankfully for eBay, Whitman was right about the value of Skype. Six years later, Microsoft acquired Skype for $8.5 billion. Overall, eBay received a net profit of $1.4 billion.

4) New York Central and Pennsylvania Railroads

In 1968, Pennsylvania Railroads and New York Central merged to form Penn Central. At the time, Penn Central was the largest company in the transportation industry and the sixth largest corporation in America. This merger seemed to create a titan in the transportation sector, but in reality, this merger was an ill-conceived attempt to keep up with the shifting interest towards other modes of transportation. 

Pennsylvania Railroads and New York Central had a century-long rivalry that led to cultural differences post-merger. The two railroads had differing focuses: commercial shipping and passenger transportation. The impulsive merger couldn’t work through these obstacles in the face of a societal transference towards vehicles and airplanes. Two years post-merger, Penn Central filed for bankruptcy protection.

5) AOL and Time Warner

America Online (AOL) purchased Time Warner for approximately $165 billion in 2000, thus closing on what is inarguably one of the worst M&A deals in history. Unfortunately, an incorrect prediction of the future media landscape combined with poor due diligence led to a major loss for AOL. In 2000, the dot-com bubble burst, and only two years later, AOL reported a loss of $99 billion.

Due to financial restrictions, AOL struggled to transition from dial-up Internet to higher-speed broadband connections. The two companies did not properly execute on the media convergence of mass media and the Internet. This in concurrence with cultural clashing and the inability to manage 90,000 employees, the company rebranded as just Time Warner. Later, AOL was purchased by Verizon for $4.4 billion.

Conclusion

No mergers and acquisitions deal is without risk, but there are many things you can do to mitigate it. Proper due diligence, awareness of potential cultural incompatibilities, and unclear plans are common pitfalls that lead to these M&A failures. Consulting M&A experts is integral for post-merger success. Connect with one of Stony Hill Advisor’s experienced M&A professionals today!