Mergers and Acquisitions — M&As for short — are some of the major transactions in the corporate world. This article deconstructs what they are and how they work, and offers insight into the five of the worst M&A transactions in history.

A merger is a type of transaction between two existing companies uniting them into one company. Simply put, it is the combination of two firms forming a legal entity of one corporation, rather than remain separately owned and operated. Stocks of both companies are surrendered, and new company stock is issued instead. A deal usually occurs when both companies agree that combining would be in the best interest of both parties.

As M&A is an umbrella term for the combination of two companies, an acquisition slightly differs in meaning from a merger. In an acquisition, one company purchases and acquires another company outright. The company takes the acquired company over and is established as the new owner. Legally, the target company, or the company that is bought, ceases to exist. Their stocks cease to trade.

While friendly acquisitions — when the acquired firm agrees and approves of the acquisition for mutual benefit — are the most common, unfriendly acquisitions, known as “hostile takeovers” also occur. In these cases, the target company does not agree to the acquisition. If the acquired firm does not agree, the acquiring firm actively pursues different strategies to purchase a majority stake of the target company to force an acquisition.

Company A can buy Company B with cash, stock, debt or a combination of these three. The boards of directors of the companies approve the deal and obtain shareholders’ approval. A majority of the shareholders must vote in favor of the deal. Those who vote against the merger or acquisition can refuse to swap shares. Instead, they may ask for cash based on the value of their stock. Most M&A deals take a long time from the initial deal to consummation.

The ultimate reasoning behind M&A deals is usually that two companies, when combined, create more value or become more successful compared to operating individually. Here are some examples of why companies may want to pursue mergers or acquisitions.

A company may want to merge with another to eliminate competition. They may also want to merge in order to have access to increased resources, such as advanced technologies, new markets, product lines or customer bases.

In general, companies seek synergies. With combined business activities, overall performance or productivity may increase. When an M&A deal is considered to be successful, it should enhance the value to both parties.

Despite the goal of mutual benefit, KPMG indicates that 83 percent of mergers do not result in a boost in shareholder returns. Here are five of the worst:

America Online and Time Warner (2001):165 billion USD

The merger of media companies America Online and Time Warner is the highest valued merger with a hefty amount of 165 billion USD. Prior to the merger, Time Warner was falling behind as the market switched to online platforms. As a last resort, the company took interest in America Online, also known as AOL, which was dominating the market with a sky high stock market valuation. The merger caused great concern among competing companies as it would give Time Warner access to tens of millions of subscribers. However, things went downhill rapidly. The rushed nature of the merger exacerbated the gap between the cultures of the two companies, leading to mutual disrespect and an inability to agree on decisions. The managers of merged companies fell short of understanding the new media market landscape and pushing many customers on the platform to overpay. In a matter of months, the dot-com bubble burst, causing a recession in the market. Eventually, Time Warner reported a goodwill write-off — the expense that was paid for the value of intangible assets in the acquiring company — worth 99 billion USD and the market capitalization of America Online fell from 266 billion to 20 billion USD.

Daimler-Benz and Chrysler (1998): 36 billion USD

DaimlerChrysler AG, the merger between Daimler-Benz and Chrysler Corporation was the biggest purchase of a foreign buyer of a U.S. company in history. It enabled Benz to gain a prominent market position in the U.S. market, while Chrystle Corporation was able to benefit from the high quality and low cost car production. The merger lasted for nine years and enjoyed huge success in the beginning as the market share price rose. Unfortunately, this did not last long as the U.S. market was switching to the era of SUVs and away from DaimlerChrysler AG’s minivans. With the lack of a long term growth plan or a market forecast, the merger fell apart quickly with DaimlerChrysler AG reporting a loss of 1.5 billion USD. Even after seeking a four billion USD bailout from the U.S. federal government in 2008, DaimlerChrysler AG failed to stay afloat and filed for bankruptcy in 2009. The failure of this merger is believed to stem from the miscommunication between the two foreign companies, which inhibited the setup of a growth plan to accommodate for the SUV era.

Google and Motorola (2012): 12.5 billion USD

In 2012, Google acquired Motorola for a price of 12.5 billion USD with the promise to reinvigorate the company and produce innovative smartphones that are able to compete with Apple and Samsung. The strategy seemed to be a perfect plan as Google’s Android operating system was already the second biggest player in the market. However, the plan proved complicated in practice, especially given the competitiveness of the smartphone industry. Google was disappointed in the quality of phones made by Motorola to the point where they contracted Samsung and LG to develop its Nexus handsets. 22 months after the acquisition, Google sold Motorola to Lenovo Group, the Chinese electronics colossus, for 2.9 billion USD. While Google was still able to gain 17,000 technological patents from Motorola, they still reported an overall loss of four billion USD.

Microsoft and Nokia (2013): US Seven billion USD

Following Google’s steps in wanting to break into the market of electronic devices, Microsoft decided to acquire Nokia for seven billion USD. With Nokia’s mobile devices, design team, licensing agreements and approximately 32,000 employees, Microsoft soon announced the production of Microsoft Lumia. Unfortunately, there were many issues in management and communication which caused job cuts totaling 20,000. Nokia was continuously losing market shares to Apple and Samsung. In 2018, Microsoft sold Nokia to HMD Global and Foxconn Technology for just 350 million USD.

KMart and Sears (2005): 11 billion USD

In 2005, KMart and Sears merged; at the time, both retailers were weak and not performing well. Kmart Holding Corp. chairman Edward Lamper planned to bring Sears’ Craftsman tools and KMart’s Martha Stewart Everyday home goods in stores together to create a company that was able to compete with Target and Walmart. However, the economy of scale strategy that Lampert implemented did not work because neither of the companies was able to sustain their market presence under the pressure of e-commerce and consumer preference changes, especially with the lack of a proper investing and growth plan. Eventually, Sears Holdings Corporation. had to declare bankruptcy in 2018 after 125 years of existence.