Saturday, January 9, 2016

Typical Publicly Traded US Companies Last About Ten Years Before Purchased, Merged Or Liquidated: Mergers More Common Than Liquidations

From The Wall Street Journal, "Comparing Microsoft to an Elephant: Using Science to Understand the Lifespans of Companies and Creatures" by ByIrving Wladawsky-Berger:
Using a statistical technique called survival analysis, the SFI [Santa Fe Institute] researchers discovered that “a firm’s mortality rate – its risk of dying in, say, the next year – had nothing to do with how long it had already been in business or what kinds of products it produce.”  With the exception of outliers that’ve been around for a very long time– DuPont was founded in 1802, Citi in 1812, GE in 1892, IBM in 1911– “the team estimated that the typical company lasts about ten years before it’s bought out, merges, or gets liquidated.”
The study showed that mergers and  acquisitions are a more common reason for a company’s disappearance than outright liquidation. Forty-five percent of firms cease to exist because they’re either acquired or involved in a merger, so they persist in some form as part of some other entity. Rather that being a business failure, a merger or acquisition may actually make the resulting organization stronger and more productive.
Why does the typical firm live around 10 years irrespective of how well-established it is or what it actually does?  The reasons for this finding are beyond the study’s scope, although the article hints that the competition for resources in biological ecosystems might provide some sort of insight. Perhaps companies can be seen as “competing for finite resources within a complex ecology of economic interactions… and their longevity is the result of their successes of learning and adaptation in these environments.”

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