Mergers and acquisitions present a fantastic opportunity for new business growth, improved capabilities, and increased value to shareholders. Ideally, the business will thrive from the newly acquired resources and see boosts in market share and efficiency. However, some mergers and acquisitions fail spectacularly. Let’s analyze a few of the most notorious M&A disasters in the 21st century.
- Time Warner and AOL Merger
Entertainment giant Time Warner and internet pioneer AOL signed an industry-shaking merger of $162 billion back in 2000. This deal was during the peak of the dot-com bubble and Time Warner saw this as an excellent opportunity to establish a significant online presence for their content. AOL looked to add valuable entertainment content to its already popular platform. On paper, it seemed like a great deal.
The deal was sour from the beginning as the two company cultures clashed and the dot com bubble burst, causing AOL to plummet in value. Dial-up internet was quickly fading into irrelevance and AOL’s subscription-based business model was doomed with the expansion of broadband internet. In 2002, AOL Time Warner recorded a corporate record for annual loss at $98.7 billion, resulting in chairman Steve Case to step down, and AOL to be dropped from the name.
- Sprint and Nextel Merger
In 2005 Sprint and Nextel merged in a $35 billion deal combining the third and fifth largest mobile phone companies. The two firms saw this as a great opportunity to save money by having their customers migrate to one network, which would eliminate duplicate assets and reduce marketing costs.
The deal looked shaky from the outset and faced immediate challenges. Sprint and Nextel had differing corporate identities and were attempting to combine incompatible network technologies- CDMA and iDEN. The deal failed spectacularly, and in 2008, Sprint wrote down $29.7 billion of the $36 billion sum it had paid for Nextel in 2005. This was a deal that never should have happened to begin with.
- Terra Networks acquisition of Lycos
Spanish internet multinational company Terra Networks was also seeking to get in on the dot-com hype back in 2000 when they acquired Lycos for $12.5 billion. At the time, Lycos was the third most-visited web site and an early leader in internet search.
Lycos plummeted after the dot-com bubble burst. It saw a rapid decline in traffic and revenue due to superior competition (Google) and an ineffective advertising strategy. In 2004, Terra Networks sold Lycos to Daum Communications for just $105 million, a mere fraction of what they had paid just four years earlier.
- Sears acquires Kmart
Sears was already a rapidly declining business by 2004, so it came as a major surprise when they announced they were acquiring fellow struggling retailer Kmart for $11 billion. Kmart had just recently emerged from chapter 11 bankruptcy in 2003. Sears saw the acquisition as an opportunity to leverage new real estate and save money in the supply chain.
The deal was a disaster as Sears and Kmart continued to lose market share and customers at an alarming rate. The 2008 recession crippled the real estate value of their store properties and the company lost $10.4 billion from 2011 to 2016. To no surprise, combining two declining retailers did not result in one successful one.
- eBay acquires Skype
In 2005, eBay purchased Skype for $2.6 billion in an attempt to improve communication between potential buyers. They envisioned a seamless integration of the video chat technology to give the selling process a more personal and connected feel.
The deal was a complete bust as the technology was not popular with eBay’s customers who were content with the incumbent messaging system for communication. Two years after the acquisition, it was written down by eBay for just $900 million and then sold away in 2011. This failed acquisition hindered Skype from taking off and damaged its public brand.
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