If the failure is sufficiently severe, the future of the company could be called into question, leading to customer and supplier flight, creating a death spiral.
These impacts can spread far and wide. For example, a company with a failed merger could ultimately lose market share as its weaknesses and its distracted management are exploited by competitors. Sometimes firms merge to acquire market share, but then fail to perform as well as the two individual entities did, resulting in market share declines. This can cause the firm's industry position to deteriorate in addition to its market share. The loss of prestige can actually impact the market share as well.
Goodwill is created on the balance sheet during a merger as the result of the difference between the cost paid for the acquired company and its book value. The goodwill is reflective of the expected synergies and gains that are expected to accrue from the transaction. Naturally, when these gains fail to materialize, this will result in a reduction of goodwill on the balance sheet. This often comes in the form of a writedown at a later date. When FedEx dropped the Kinko's name, for example, it took at $891 million charge on the income statement, which reflected in the goodwill component of the firm's equity on the balance sheet. This resulted in a decline of $2.22 on the firm's earnings for the year, which also impacted the company's share price.
Lastly, there are impacts of service capability. Firms that tie up are expected to function better together than they did apart, but when this does not happen service can deteriorate. Clashes between corporate cultures, managerial values and systems can all impact...
In addition, excessive cost cutting is sometimes used to attempt to salvage value from a transaction gone awry, and this too can have a strong negative impact on service levels.
There are many different forms of corporate restructuring, including spin-offs, carve-outs and liquidations. All of these can be recommended, depending on the circumstances of the company, industry and transaction. Spin-offs can often help a company to derive value from its units, if it believes that those units are being undervalued. It is sometimes felt by the market that different parts of conglomerates function as standalone companies and therefore there is no value in keeping those companies together. Carve-outs are more useful for tax or legal advantages, such as when some separation needs to be created between the ownership of different business units. Liquidation is the weakest of the three options with regards to extracting value, but it may be a case of addition by subtraction. The liquidated division may have been a distraction or a drag on operations, to the point where getting any value from it at all might be a bonus -- the firm is simply better off without it.
Each of the three transaction types, therefore, serves an entirely different strategic and financial purpose. Given that, it is understood that management will utilize the reorganization technique best suited to its objectives -- the best choice is entirely dependent on the situation as these three techniques are not corollary to one another. Management needs to use its discretion to determine which technique is the strongest strategically and which will add the most value to the firm in the long run.
