The Financial News of London recently printed an article where Warren Buffett discusses the importance of a boards responsibility to focus on shareholder value. If this premise is true why are less than stellar boards tolerated during periods of loss shareholder value that is due in large part to failed M/A activities. Why do board members have a high level of tolerance for approving and supporting the M/A failures of integrations syngeries?
This is quite widespread and unfortunate indeed, and I can think of a few possible reasons:
1. Not getting into the details of the results of due diligence when a rosy picture is presented to them early on.
2. Blind faith in the executive directors such as CEO, and the M&A teams. Not questioning their assumptions.
3. Prestige and empire building aspirations.
4. During early days after the acquisition, they tend to remain patient. This is because, in many cases, a short term downtrend of share value is expected.
5. Many acquisitions have almost become a gamble. With most literature quoting failure rates of M&As anywhere between 50% and as high as 90%, shareholders have come to expect failures, instead of doing their best to change those statistics. This is especially true when the CEO is able to justify the failure by using a change in market scenario or an unforeseen event as an excuse.
6. Beyond a point as the merger fails, sunk cost fallacy kicks in. This is especially true if the root cause of failure is not integration, but the lack of a comprehensive due diligence. Eventually, they become just helpless observers.
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