Cultural due diligence ties the knot in M&As

By Désirée-Jessica Pély and Henrik Cronqvist *

(exechange) — August 1, 2020 — An intriguing observation about M&As is the frequency of corporate divorces: Over the past quarter of a century, 46% of M&As ended in “divorce.” Although unforeseen post-M&A industry changes play a role, cultural disparities between the merging entities are responsible for most divorces. (1)

As many divestitures (up to 77%) are classified as unsuccessful, corporate divorces represent a correction of failure mechanism resulting from poor due diligence rather than post-merger surprises.

Nevertheless, managers oftentimes “hang on to losers” instead of divesting assets to not signal poor decision-making ability. (2)

Indeed, 40% of the divorces occur in the first four years after the arrival of a new CEO.

The divorce rate is higher if assets are acquired during economic booms, suggesting that executives neglect cultural due diligence in times of cheap financing and skyrocketing valuations.

Generally, a strong corporate culture not only reduces the chance of divorce but can also help to overcome challenges during crises, which is why cultural due diligence should always be on the agenda of CEOs.

(1) This article is based on: Cronqvist, Pely (2020): Corporate Divorces: An Economic Analysis of Divested Acquisitions, Working Paper.

(2) Boot, A. W. A. (1992). Why Hang on to Losers? Divestitures and Takeovers. The Journal of Finance, 47(4), 1401–1423. Weisbach, M. S. (1995). CEO Turnover and the Firm’s Investment Decisions. Journal of Financial Economics, 37(2), 159–188.

* Pély is a scientist at the Ludwig Maximilian University of Munich, and Cronqvist is professor at the Miami Herbert Business School.

Editor’s note: This is a guest post.