Bwin and Party – a match made in heaven?
First there was news of flirting, then an engagement, and now the announcement of a marriage to create the largest online gambling company in the world. The effect was to cause a shudder through the online gambling industry at the prospect of competing against such a large company that could bring further resource to marketing and economies of scale that could leverage 20 percent growth on day one.

Fear not. Divorce rates vary but in the West about half of all marriages fail. Conversely, a 2004 study by Bain & Company found that 70 percent of mergers failed to increase shareholder value. More recently, a 2007 study by Hay Group and the Sorbonne found that more than 90 percent of mergers in Europe fail to reach financial goals.

 

“If the definition of a successful merger is driving up shareholder value, then their failure rate is far north of 50 percent,” says Lawrence Chia, a managing director of Deloitte in Beijing, China. 
The path to the altar is strewn with failed corporate marriages: Daimler and Chrysler, AOL and Time Warner, Dunlop and Pirelli, Shanghai’s SAIC Motor Co. and Korea’s Ssangyong Motor Co. (which filed for bankruptcy protection this year). 
According to Harvard Management Update, most mergers fail to add shareholder value. Indeed, two thirds of the newly formed companies perform well below the industry average. 
A key risk to a successful merger is how the various management teams get along. If one company does things differently to the other and there is no common ground in the process of arriving at key decisions, then such mergers normally end in failure. 
Bwin, the groom, and Partygaming, the blushing bride, will bring together two different management cultures – the one Germanic and the other North American. 
Business Week also cites 25 proposed mergers that were announced but subsequently failed to materialise for various reasons. So this merger proposed for January 2011 may not even happen. 
Perhaps more worrying for the shareholders and the management of both companies is that a “death cross” has appeared in the financial charts of both companies. A death cross occurs when the 50 day moving average crosses the 200 day moving average. Such a move normally precipitates a fall in value, sometimes as much as 30%. 
The fundamentals are not looking good. Both companies are spending increasing amounts on marketing without the return to EBIT as we continue to be dragged along by the Great Recession.