Question

How has the trend of mergers and acquisitions impacted the profitability of corporations?

The trend of mergers and acquisitions has had a significant impact on the profitability of corporations. While these actions often aim to create synergies and increase profitability, research indicates that almost 70% of mergers fail to produce the promised revenue synergies. This failure often leads to a decrease in return on assets, a key profitability indicator. Additionally, the creation of 'too big to fail' megafirms through mergers and acquisitions can lead to increased risk and potential financial instability. In response to these challenges, firms often resort to cost-cutting measures such as reducing R&D costs, outsourcing, and laying off workers, which can further impact profitability and productivity.

This question was asked on:

Corporate longevity has plummeted—the half-life of all firms is now just 10.5 years—and the average stock holding time has fallen from 8 years to 5 days. Corporations are getting bigger but their return on assets, the ratio of their profits to what they own and owe, is trending steadily downward. Mergers and acquisitions are creating "too big to fail" megafirms even as research from McKinsey has shown that almost 70% of mergers fail to produce the promised revenue synergies. In response, firms are cutting R&D costs, outsourcing, and laying off workers. Labor productivity growth has turned negative in recent years, while the pay ratio between CEOs and workers has jumped from 22: 3.1 in 1973 to 271:1 in 2016. Meanwhile, innovation is coming from elsewhere; small businesses, for example, now produce 16 times more patents than big ones.

View book summary Preview