Business

How Can You Know If A Merger Is A Good Idea?

Understanding the long term effects of two merging companies is complex. There are the melding of cultures, product lines, egos, and, not to mention, workforces. With all these complex variables, it’s no wonder so many mergers fail, and even more miraculous when some wildly succeed.

Revelio Labs

10/20/20

Understanding the long term effects of two merging companies is complex. There are the melding of cultures, product lines, egos, and, not to mention, workforces. With all these complex variables, it’s no wonder so many mergers fail, and even more miraculous when some wildly succeed.

So what makes a good or bad merger, and how can we predict them better?

By studying how workforces complement each other -- both by occupation and geographically -- we see a strong correlation in mergers between diverse companies and higher stock price.

Below are a list of top mergers with their occupational differences. The color of the bar represents the excess return of the parent company beyond the average stock market two years later:

plot

Below are a list of top mergers with their geographic differences:

plot

After grouping companies by their average dissimilarity, from both occupations and geography, we find strikingly divergent stock performance two years after the mergers:

plot

Takeaways:

  • It stands to reason that pairs of companies with complementary strengths and focus areas will result in the most successful mergers. We see evidence of this from the 41 largest mergers since 2010.
  • Company dissimilarity can be measured either by occupational differences or geographic differences. They are both positive predictors of merger success, geographic differences being the more important of the two.
  • While occupational and geographic dissimilarity are both indicators of successful mergers, they’re actually uncorrelated. When companies are both occupationally and geographically different, the chances of a successful merger increase significantly.

If you have any ideas of other metrics to track or would like to hear more, please feel free to reach out.

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