Study: Customer Dissatisfaction Can Erode Merger Benefits

J. Merritt Melancon

Wednesday, June 1st, 2022

When two companies merge, they see an initial benefit, but consumer dissatisfaction often erodes the new company’s value. According to new research from the University of Georgia, big brands often struggle to maintain their market power after tying the corporate knot.
Sundar Bharadwaj, the Coca-Cola Chair of Marketing at UGA’s Terry College of Business, noticed a pattern of disgruntled customer complaints after the mergers of airlines, media companies or consumer brands. He wanted to know if customer dissatisfaction ever offset the benefits the companies realized from the merger.
“Most of the business research about (mergers and acquisitions) has focused on the economics of the deal and financial implications for the company and integration challenges,” he said.

 “But when you read real-world stories post-merger, you hear about the frustrations that customers face — higher prices or losing their preferred status with an airline or hotel chain. You keep hearing these horror stories from the consumer and stories of consumers switching brands.”

Bharadwaj and his co-authors analyzed more than 2,000 mergers. They found most merged companies lost market value in the long run, and those losses eventually overshadowed the efficiencies and cost savings the companies initially gained from the merger.
Bharadwaj’s team drew sample firms from merged public companies listed in the Securities Data Company Platinum database, the industry standard for information on publicly traded companies. The researchers analyzed merger and earnings and profit data two years before and two years after each merger.
“It’s not uncommon for a larger company to suffer after acquiring a smaller, sometimes struggling company,” Bharadwaj said. “They are taking on the debt of the company and all of their liabilities. But we thought there was more to the story.”
They also tracked customer satisfaction over four years for each parent company and their merged companies in the American Customer Satisfaction Index.
“One of the things I study is customer satisfaction [and the economic impact it has on companies],” he said. “In those studies, we found that higher customer satisfaction is a leading indicator of a [financially healthy company]. Using the same data, we were able to track the customer satisfaction of both companies before the merger and then after the merger.”
They found merged companies experienced marked cost efficiencies in the first year, but most efficiency benefits disappeared at the end of the two years. Those seeing gains eroding the most were also hit hardest by the loss of customer satisfaction, Bharadwaj said.

The researchers theorized this was because the C-suite leadership was more preoccupied with righting their financial ships and less with meeting customers’ needs.

To test this, the team analyzed the text of executive letters to shareholders. Letters with a higher percentage of financial talking points versus marketing talking points suffered the largest declines in customer satisfaction.

The companies that valued financials over customers suffered the greatest profit losses.

The exceptions — companies that did not lose substantial customer satisfaction after the mergers — were those with strong marketing or sales representation on their corporate boards, Bharadwaj said.

“Whatever you gain in efficiency, you lose through the loss of customers,” he said. “But we found a solution to this. If you have one marketing person on board, presumably you stay more focused on customers’ sentiment, and then you mitigate this effect.”