Mergers and acquisitions are one of the most exciting things in the financial world. However, business deals can also backfire, leading to losses and even company closures. The greed from some Wall Street deals is easy to find with books like Barbarians at the Gate, which immortalized the leveraged buyout of RJR Nabisco, and The Big Short, which follows the mortgage debt crisis that led to The Great Recession.
Not all business deals result in the loss of trillions of dollars like in The Great Recession, but they may leave an irreparable mark on the implicated businesses, sometimes forcing them to shut down for good. Here are five stories of business deals gone bad.
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AOL and Time Warner
America Online, later renamed AOL, was a pioneer in dial-up internet service. About half of all homes in the United States used AOL to get online in the late 1990s. In the year 2000, AOL bought Time Warner for $160 billion to create a massive media conglomerate. But that was a marriage destined to fail.
The Dot Com bubble burst shortly after, and AOL wrote down $99 billion in assets in 2002. AOL began to lose subscribers who began demanding broadband speeds and dedicated internet connections. In 2009, the companies broke apart and went their separate ways. AOL was acquired by Verizon for $4.4 billion in 2015. AT&T is currently in an agreement to acquire Time Warner for $108.7 billion.
Google and Motorola Mobility
Struggling to grow its own line of smartphones despite its ownership of the Android operating system, Google purchased Motorola Mobility for $12.5 billion. Some analysts believed this would save the beleaguered phone manufacturer after five consecutive quarterly losses. The deal closed in May 2012 and led to 4,000 layoffs of former Motorola employees.
Google struggled to turn the flailing phone company into a meaningfully profitable venture. It sold off Motorola’s modem and set-top box businesses in late 2012 for $2.35 billion. In January 2012, less than two years after buying the company, Google sold Motorola Mobility to Lenovo for $2.9 billion. Taking into account the prior division sale, Google lost over $7 billion on the deal.
Radio Corporation of America
Radio Corporation of America, or RCA, was founded in 1919 as a division of General Electric. The company was integral in the development of TV and radio in the United States, and grew to prominence over many decades as a leading manufacturer of TVs. However, it was ventures into other, not related, businesses that led to its demise.
By the 1980s, RCA was involved in music, broadcasting, rental cars, appliances, computers, frozen foods, carpeting, book publishing, and greeting cards. The strategy of growth through diversified acquisitions failed, leading to financial losses and disarray at the historic company. In 1986, General Electric re-acquired the company and sold off many assets. The RCA trademarks are owned by Sony and Technicolor, who license the brand out for various products.
Daimler-Benz and Chrysler
Chrysler is an iconic brand in American cars, but iconic does not mean profitable or sustainable. In 1998, European automaker Daimler-Benz, the owner of the prestigious Mercedes-Benz brand, purchased Chrysler for $36 billion.
Budget brand Chrysler was never a great fit for the luxury automaker, and as the US auto business skirted with catastrophe in The Great Recession, Chrysler turned from an asset to a liability for Daimler. With the auto crisis unfolding, Daimler paid Cerberus Capital Management $650 million to take Chrysler in 2007.
Sears & Kmart
In business school, a professor once told my class that “merging two failing companies usually leads to one giant failing company.” That has proven the case with Kmart and Sears. In 2005, Kmart acquired Sears for $11 billion. Both retailers went into a tailspin of declining sales as the combined company struggled to stand up to online giant Amazon, mega discounter Walmart, and other competitors.
In 1989, Sears was the largest retailer in America. But since 2007, sales have fallen every year from over $60 billion to a projected $22 billion for 2017. From 1994 to 2017, Sears and Kmart saw their total US square footage decline by nearly half. In the same period, Walmart and Sam’s Club has nearly tripled its square footage. Sears Holdings regularly closes stores, though it still has over 1,000 locations. However, there is a real possibility the company may go out of business and close for good.
Sears and Kmart are facing an enormous struggle partially due to its inability to access credit at affordable rates. Parent company Sears Holdings had its credit rating cut by Moody’s in January to Caa2 from Caa1, deep in the risky “junk bond” ratings. As of that point, its bonds due in October 2018 traded at 93 cents on the dollar. As the company struggles to keep stores in good shape and stock the shelves, bond traders are acting as if the company is on the way out for good.
Big Deals and Credit Matter
No matter the size of your business, any deal can be a make or break moment for the business. At the same time, entering into major agreements can impact a business’s credit, as was the case very recently with Sears Holdings.
Whether you are the sole employee of your business or part of a large team, it is vital to ensure your company has both great credit and only enters into deals with a great long-term synergy. If you don’t, you could end up like RCA, Sears, or one of the other companies on this list: struggling to stay in business, if you are in business at all.