Good for business, bad for customers? The double-edged sword of M&A
There were 43 mergers and acquisitions (M&A) of over $10 billion in 2019 – an 8% increase from 2018. There were another 21 deals worth more than $20 billion a piece.
This is just the start.
The worldwide value of M&A transactions reached a total value of $3.9 trillion in 2019. While that’s 3% less than 2018, it’s the fourth-strongest year ever recorded.
This is good news for investors. The same cannot be said for customers.
The American Customer Satisfaction Index shows that large M&A deals commonly have a negative effect on customer satisfaction. On average, the acquiring company experiences a 3% drop in customer satisfaction over the initial two-year period post-merger.
Why is that? There are a few major reasons – but sometimes it depends on the industry.
1. It’s not about customers
M&A often has a negative effect on customer satisfaction because it isn’t done on behalf of customers; it’s done on behalf of shareholders.
Typically, in an acquisition, companies aren’t trying to grow their customer base by improving how they provide goods and quality services. They’re literally buying another customer base.
The goal for these companies is delivering value to shareholders. In the process, they can alienate consumers, ultimately working against their own goal.
2. Customers in service-related industries suffer the most
Customers of manufacturing-related industries usually don’t notice a difference following M&A. If a company buys a line of canned food, for example, and keeps putting it out with the same label and the same quality, the customers who purchase that product aren’t really affected. They still receive the same product, made the same way. The only difference is the organization behind the scenes that now owns the brand – and customers might not even know that’s changed.
For customers of service-related industries, however, the change in ownership is felt in a big way.
Banking, retail, airlines, utilities, and anything else involving services, is where you typically see a significant customer satisfaction drop in the wake of a merger up through the first two years of the union.
For example, back in 2005, US Airways fell 8% to an industry low after merging with America West. And just one year after purchasing Northwest, Delta Airlines’ customer satisfaction plummeted 10%.
When two companies merge, both sides begin shedding costs. These costs are usually customer-service focused. For example, a handful of branches might close following one bank’s purchase of another. In this event, customers may no longer receive the same level of service they’re used to.
There’s also the possibility of unexpected snafus. Maybe your frequent flyer miles get lost when two airlines merge and you’re arguing with customer service over how to get them back. Or maybe you get double-billed for cable services or wireless networks.
T-Mobile and Sprint are suggesting their merger will benefit customers. But a lot can go wrong when you combine large customer bases.
Perhaps Sprint customers will experience an uptick in customer service if the provider merges with T-Mobile, as they’ll move from an organization with the lowest American Customer Satisfaction Index score (65) among mobile network operators to the one with the highest mark (76) in the same sector. Then again, customers may have such high expectations for T-Mobile that the service they receive fails to live up to it.
3. The bargain basement
The best companies aren’t typically going out and acquiring other top companies. What usually happens is that subpar companies go out and purchase even worse companies. It’s a weird strategy.
Sure, they can acquire these low-end companies on the cheap, but is it really in their best interest to purchase another bottom-dweller? Probably not.
These companies already have dissatisfied customer bases. If the purchaser is not interested in improving satisfaction levels, then those customers might end up even less satisfied than they were before the merger – especially if they had high expectations for this union.
A lesson for the age of the large acquisition
The numbers don’t lie: Major M&A deals were on the rise in 2019. Global Payments bought TSYS for $21.5 billion. London Stock Exchange Group acquired Refinitiv for $27 billion. United Technologies agreed to purchase Raytheon for $86 billion. These are just a few of the transactions over $20 billion.
While the total number of global mergers was down in 2019, M&A value still exceeded $3 trillion every year since 2014. The merger market is expected to thrive in 2020 thanks to low interest rates and a better economic environment.
But before these organizations – particularly service-related companies – make decisions that are clearly geared toward influencing their balance sheet and adding to their portfolio, they might want to think about what this decision means for their customers.
You might be able to buy a customer base, but that doesn’t mean you’re buying its loyalty or you’re able to improve its satisfaction.