In most cases, what they say is true: Bigger is better.

Who wouldnt want a bigger bank account, a bigger office, or a bigger house? Logically, it would follow from this idea that the way to get the bigger bank account is by making a bigger business. In some cases thats true, but if youre thinking of expanding your business by acquiring a competing company, you need to think again. Why? Just ask someone who owned Chrysler stock in 1998. In May of 1998, Chrysler struck a huge merger deal with the German carmaker Daimler-Benz. It was an enormous purchase, costing Chrysler 38 billion dollars. When asked about the merger, the then-Daimler company chairman Juergen Schrempp proclaimed, This is much more than a merger We are combining the two most innovative car companies in the world. On paper, the plan sounded perfect. Unfortunately, in practice, it was just the opposite. Both companies quickly began losing money, and Chrysler was forced to make some unexpected cutbacks as a result. The saddest thing about this story is that we now know, scientifically, that the Chrysler-Daimler merger was doomed before it even started. So how do we know that? In April of 2003, Roberto A. Weber and Colin F. Camerer ran an experiment to test the relative efficiency of businesses before and after a merger. More specifically, they wanted to show that the merger of groups with different organizational cultures decreased the productivity of not only the employees of the acquired company, but the employees of the acquiring company as well. The scientists claimed that there were unique, idiosyncratic languages that developed between managers and employees, sort of like most people have inside jokes with some of their friends that outsiders wouldnt understand. Weber and Camerer believed that having to explain this unique language to new employees would slow down the rate of business significantly, sort of like explaining an inside joke to a friend who isnt in on it tends to slow or break the rhythm of a conversation. Weber and Camerer also stated that people are likely to underestimate how long it takes for newly merged groups to all share the same inside jokes. So, to test this theory, Weber and Camerer set up an experiment. They took a

group of Carnegie Mellon and CalTech students and assigned them to two-person companies. These companies were given a grouping of sixteen pictures of normal offices with different numbers of people and different arrangements of equipment. The manager and employee of each group were charged with ordering eight of the 16 pictures as fast as possible. The two-person groups did this twenty times each. Groups started pretty slowly, (averaging about three minutes per attempt for the first five rounds or so), but after ten to twelve rounds got to be much more efficient (about one minute per round on average). Then, the researchers threw the groups a curveball: they merged all of the different two-person companies into three-person, merged companies. As you would expect, the newly merged three-person companies were much slower at first. The first round after the merger took almost three times as long as the round just before the merger on average. The new employees didnt get the inside jokes and the old employee and manager had to take the time to explain things to the new employee. It slowed everyone down significantly, and in some cases led the new employee and the old company to be annoyed at each other for slowing down the process. The new three-person companies did ten rounds of work, and they got more efficient as they went, but even after ten rounds, the new three-person groups were still not as fast as the two-person groups were at the end of their initial twenty-round test, even though there was an extra worker to help out. This experiment oversimplified things a good bit, mostly because it focused primarily on the differences in how people talked to each other in different companies. Generally speaking, real world companies have more than two people, and real world jobs are more nuanced than an elementary game of find that picture. However, the results that Weber and Camerer received seemed to confirm their original theories clearly. The merged groups were slower after the merger even after an additional ten rounds of work. Having a bigger company didnt automatically make the companies faster; it actually made them slower. As a part of the experiment, the volunteers were also asked to grade how well their fellow workers did. Both sides graded the new members of the group

more harshly than they did their original partner in the two-person group: The managers and the original employees thought that the new employees slowed down their work, and the new employees favored their old bosses over the new boss of their merged group fairly universally. The takeaway from the experiment, as Weber and Camerer put it, is that failures for merged companies to work together explains the widespread failure of corporate mergers.