When deals go bad — the post-merger reality nobody talks about at the announcement

The day a deal is announced tends to be one of the most carefully choreographed performances in the corporate calendar. Confident executives stand in front of flashing cameras, slide decks talk about transformational opportunities, and the phrase “compelling strategic rationale” is used more times than anyone cares to count. What comes next rarely makes the same headlines.

The uncomfortable reality of mergers and acquisitions is that the moment a deal closes is often the high watermark. From that point forward, the hard work begins — and the hard work, as a remarkable body of research has consistently shown, tends to go badly. Not always. Not inevitably. But far more often than the people doing the deals would ever have you believe.

The pattern is almost boringly predictable once you have seen it a few times. A company identifies a target, convinces itself and its shareholders of the strategic logic, lines up advisers who have every financial incentive to get the deal done, and announces to great fanfare. The share price of the acquirer often falls on the day, which is a signal worth paying attention to. Integration begins. Synergies prove elusive. Key staff leave. The cultures do not blend. And two or three years later, a quiet announcement emerges about a write-down of goodwill — accounting shorthand for admitting that what was paid bore no relationship to what was actually worth acquiring.

The Royal Bank of Scotland and ABN Amro deal remains the canonical British example of how catastrophically this can go. In 2007, a consortium led by RBS paid around £49 billion for ABN Amro, outbidding Barclays in what became one of the most hubristic corporate transactions in history. Fred Goodwin, then chief executive of RBS, pressed ahead despite mounting signals from financial markets that something was deeply wrong. The timing could scarcely have been worse. Within months, the global financial system was beginning to fracture. RBS required a bailout from the British taxpayer that ultimately cost tens of billions of pounds, and the bank spent the better part of the following decade trying to recover from a single act of corporate overreach. The ABN Amro acquisition did not cause the financial crisis, but it meant that RBS entered that crisis with almost no room for error.

The story of AOL and Time Warner, though American in origin, is instructive for any investor who wants to understand the mechanics of how deals unravel. At the peak of the dot-com boom in 2000, AOL acquired Time Warner in a deal valued at around $165 billion, one of the largest transactions ever completed. The logic, such as it was, held that a digital giant would transform a traditional media company. Within two years, AOL Time Warner reported a loss of more than $98 billion, much of it from goodwill write-downs. The merged company eventually split apart. The supposed synergies never arrived. The deal became a textbook study in what happens when financial engineering meets wishful thinking at the top of a market cycle.

Kraft’s acquisition of Cadbury in 2010 provoked considerable public anger in the United Kingdom, and not just for the obvious cultural reasons. Kraft had borrowed heavily to finance the deal, and the cost of servicing that debt put pressure on the business almost immediately. The Somerdale factory in Somerset, which Kraft had pledged to keep open during the takeover battle, closed within months of the deal completing. Jobs went. Promises turned out to be worth rather less than they appeared. The episode became shorthand in British business circles for the kind of promises that acquirers make to ease regulatory and political scrutiny, only to reverse once the money has changed hands.

More recently, Bayer’s acquisition of Monsanto in 2018 for approximately $63 billion demonstrated that even a highly experienced European company can badly misjudge a transaction. The Monsanto deal brought with it not only a business but a vast litigation liability relating to the herbicide Roundup and its alleged links to cancer. Within years, Bayer’s share price had fallen sharply, and the company had set aside billions of dollars to settle claims it had not fully anticipated when it agreed the price. The goodwill impairment charges that followed told the story in accounting terms. In plain English, the company had paid an enormous sum for something that turned out to be worth considerably less.

The Just Eat and Grubhub combination, agreed in 2020 for around $7 billion, ended with Just Eat selling Grubhub in 2024 for just $650 million. A deal that was presented as a path to global dominance in food delivery became one of the most costly capital destruction exercises in the sector’s history. The American market proved far harder to crack than the projections suggested, and by the time the sale was completed, shareholders had absorbed extraordinary losses.

For the private investor watching from outside, the lesson is not that all acquisitions fail. Some are genuinely transformational, and some acquirers do buy well, integrate carefully, and create lasting value. The lesson is that the announcement is not the moment to make a judgement. The announcement is the moment when everyone involved has every reason to present the most optimistic possible picture. The due diligence is done, the fees are locked in, and the lawyers and bankers are already moving on to the next transaction.

What to look for instead is what happens in the quarters that follow. Does the acquirer maintain its underlying earnings momentum, or does integration drag weigh on results? Are the promised cost savings actually materialising, and on what timeline? Is goodwill on the balance sheet growing as a proportion of total assets, creating the risk of future impairment? Is the chief executive who championed the deal still in post two years later?

None of these are foolproof signals. But they are better signals than anything said at the announcement press conference. The City has a long and well-documented history of talking up its own deals. The private investor who learns to wait for the evidence rather than the rhetoric tends to make rather better decisions than the one who buys on the day the press release goes out.

This post is drawn from The Street-Smart Trader by Ian Lyall. Republished with permission.

Street Smart is a series drawn from first-hand experience of the City of London, updated as each new chapter arrives.

Disclaimer: The value of investments can go down as well as up, and you may get back less than you invest. This article is for informational and educational purposes only and does not constitute financial advice. Always do your own research and consider seeking independent advice before making any investment decision.