Large Mega Mergers Are Bound For Failure Essay

I don´t think one should generalize saying that all large mega mergers are bound for failure. To answer that question I believe we should take a deep analysis on how value is created in mergers.
Most companies rely on the discounted cash flow method to value companies. This method reasonably provides an estimate of what the target company is worth and value is created when the return on capital employed in an acquisition exceeds the target company´s weighted average cost of capital (WACC).
What happens in large mega mergers is that the evaluation of the target company value becomes much more complex. Synergies and benefits are much harder to estimate and it’s very common to see a company being overpayed. This is the case when excessively confident managers, that overestimate their ability to extract acquisition benefits, tend to bid for larger firms. Another reason for managers overpay large firms is because they provide large high private benefits.
For these reasons a large number of mega mergers fail. According to Boston consulting group, the “megadeals” that are priced over $1 billion destroy twice as much value to shareholders relatively to small deals1.
As an example of these large mergers we can look to the Facebook and Instagram $1 billion deal. Instagram was a company without revenues and synergies were worth much

They used a variety of deals to generate a positive economic profit in their mega merger - accelerating revenue, improving the cost of goods sold, reducing overhead, promoting R&D rationalization and consolidation, or improving working capital. However they were not succeeded and they underperformed the S&P500 index for several years. In my opinion this was like an arranged marriage, the companies were not creating enough synergies to achieve a positive economic profit and they kept overspending in their everyday