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Dallas Business Attorney Explores Why Two Mergers Failed

Dallas business law attorney, Richard “Ric” Armstrong, discusses two failed M&A cases and what your Dallas business can learn from them.

For every example we can cite of successful and profitable M&A transactions, we can probably show more attempted M&As that failed miserably. Rarely is this just bad luck, although sometimes there are circumstances outside one’s control. Usually these failed mergers have to do with things like miscalculating market value or simply not doing enough advance preparation. Let’s look at two examples of failed M&A transactions to see what we can take from them.

Sears-Kmart

The Sears-Kmart debacle serves as a great example of a long, slow decline rather than a meteoric fall. Back in 2005, Kmart’s hedge fund owner Eddie Lampert saw two failing retail giants—Kmart and Sears—and believed he could revive them by purchasing them and merging them. While merging the companies may have reduced overhead and supply chain costs, neither company did much to innovate over the years, and as online sales have continued to affect brick-and-mortar retailers, both brands have paid a hefty price. After a long and painful loss of $7 billion over the years, according to CB Insights, Sears finally declared bankruptcy in October 2018, thirteen years after the merger.

Takeaways: The act of blending two sick companies doesn’t make a healthy one. At least one of the businesses should have something to offer the other, and the new entity must still be willing to innovate to keep up with the times. Neither Sears nor Kmart could shake their stagnancy even after joining forces, so one could do nothing to help the other. Cutting costs alone wasn’t sufficient enough reason to merge them.

Sprint-Nextel

When Sprint acquired a majority share of Nextel for $35 billion in 2005, the two companies combined under the Sprint banner to become Sprint Nextel, the third largest telecom company behind AT&T and Verizon, according to Investopedia. Within three years, thanks largely to cultural and procedural incompatibilities between the brands, Sprint had slashed its overhead and laid off thousands of employees, written off $30 billion in losses (compared to the original $35 billion price tag), and achieved “junk bond” status. (Obviously, Sprint Nextel is now once again Sprint.)

Takeaways: The fact that a smaller company appears healthy and profitable doesn’t mean it’s a good fit to merge with your company. The Achilles Heel of this merger was that the two telecom companies, though reaching similar customer bases, were highly incompatible. Where Nextel maintained an entrepreneurial culture and had built solid customer loyalty, Sprint was burdened with administrative red tape and was known for their bad customer service. These differences caused constant friction, a lack of integration and ultimately led to the departure of top talent, leaving the company at risk. Had Sprint done more homework on this M&A transaction, they might have avoided this fiasco, and Nextel might even have thrived on its own.

While much can go right in an M&A transaction, a lot can go wrong, as well. Before acquiring another company or putting your company into a merger or acquisition situation, consult a Dallas business law attorney to ensure any legal blind spots are covered. Call Armstrong The Law Firm, P.C., today at 972-424-L-A-W-S (5297).

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