Corporate Collapses: What Went Wrong?

Corporate Collapses: What Went Wrong?

  • Reading time:5 mins read

By Tanisha Jain

While the world of Mergers and Acquisitions has witnessed some huge successes with Google and Android and Disney, Pixar and Marvel, there have been a few deals that fell through. The difference lies in some of them realising the failure after the agreement while some were smart enough to make a narrow escape.

eBay and Skype (2005):

The changeover to a digital scenario was transformational but many dealmakers failed to understand the dynamics of this changeover. An example is provided by eBay’s acquisition of Skype. The thinking behind it was to smoothen the transaction flow and generate more revenue by creating synergies between the buyers and the sellers. This would be done by allowing better communication between them on eBay. What eBay didn’t take into consideration was that people don’t really want to talk to strangers about transactions if they can just simply email them. They soon saw there was no real need for the acquisition and ended up selling two-thirds of Skype for US$1.9 billion just four years later. 

Microsoft and Nokia (2013) 

With the rise in smartphones, and shortly after tablets, it was a fad for the biggest players in technology, Microsoft, to announce that they would soon be producing their own handset devices. However, they seemed to have taken a shortcut for achieving this by acquiring an existing handset maker. In Microsoft’s case, this was Nokia. Once the world’s biggest handset manufacturer, Nokia, unfortunately, failed to keep up with the developments. By the time it closed down in 2015, Microsoft had written off US$7.6 billion and laid off over 15,000 Nokia employees.

AstraZeneca and Pfizer (2014)

The U.S. pharmaceutical giant Pfizer Inc. was on the hunt for another acquisition targeting their British rival AstraZeneca plc (ADR) this time. The two went through a month of hostile negotiations that ended with Pfizer making a $118 billion offer to AstraZeneca’s board. However, according to the UK-based drugmaker, they undervalued the firm and hence rejected the offer, leaving Pfizer to decide whether to put the offer to AstraZeneca shareholders. Finally, Pfizer opted to leave the decision up to the board and walked away from the deal. Although many expected that Pfizer would revisit its acquisition plans later, new inversion rules that take away from the tax benefits of international mergers have made that situation an unlikely one making AstraZeneca narrowly avoiding the takeover.

HDFC and Max Life (2016)

The merger was a reverse merger since a listed company was to be merged with non-listed (HDFC Standard Life was going to merge in Max life Limited). HDFC being a Private Company wanted to get listed. The merger with Max Life would list it automatically without going through the route of cumbersome Initial Public Offering and not only help avoid the intricacies of an IPO but also would cut down the cost substantially. As per the scheme, Max Life Limited would first merge with its parent company Max Financial Services, and subsequently, the life insurance business would de-merge from Max Financial and merge into HDFC Life. The majority stake in the combined entity was to be held by HDFC Life. It was a great strategy until the proposed merger was not approved by the sectoral authorities, Insurance Regulatory and Development Board (IRDB). The reason for the same was that Section 35 of the Insurance Act bars the merger of the insurance company with non-insurance companies which lead to the collapse of the aforementioned deal.

RCOM and Aircel Merger (2016)

The arrangement between Reliance Communication and Aircel was that Reliance Communication will hive off its wireless business into a separate arm in form of Special Purpose Vehicle (SPV) by a slum sale and leave behind its overseas arm and tower. This arm will be merged with Aircel to form a new entity that will have a 50:50 stake by both the companies. The main purpose of the merger was transferring of debt by both the companies in the new entity. The synergies out of the merger would have been beneficial in cost and debt reduction from both the companies and streamlining their Capex and Opex management. It would help them survive the highly competitive market and help them make better use of infrastructure and pooling structure as well. Inspite of this exceptional planning, the deal was called off mutually by both parties. The reasons can be attributed to the procedure being time-consuming as a lot of permissions had to be sought from courts and authorities like DOT and high taxation, the charge levied by the center on the use of spectrum through auction.

Snapdeal and Flipkart (2017)

Some of the investors in Snapdeal during the time of the merger were Nexus Venture Partners, Soft bank Telecom Corp., Alibaba, Kalaari Capital, Premjiinvest. The stakeholders of the company were of the view that the founders managed to not only make decisions but also practice mismanagement. Prior to the merger talks, the company had acquired a lot of other companies like Freecharge and additionally burnout, later sold off to a very less price. On the other hand, Flipkart is a private limited company with some of its key investors being SoftBank Vision Fund, Naspers, Steadview Capital, and eBay. Softbank was pushing forward the deal to explore more strategic options. Nonetheless, the deal could not be taken forward due to a number of reasons. Firstly, there was no consensus from the founders of Snapchat, Nexus Venture Partner, Premjiinvest and other minority shareholders as there was a differential payout to the investors. Due to a complex structure, there were huge tax liabilities on Snapdeal investors further weakening the situation. Not only this, but the non-solicit clause of 5 years by Flipkart, could have been the reason for potential conflict as the investors have investments in many e-commerce companies. Owing to all this, Snapdeal called off the deal with Flipkart to go with their Plan B, Snapdeal 2.0.