“The amount of upheaval involved in M&A, as well as the effect on organizations going through such a transition, can be significant. However, there is the potential to make a meaningful, long-term shift that will put an organization on the road to substantial future success.”
The constant need to adapt in highly competitive global markets makes M&A an appealing strategy and increasingly traditional business activity. We all know how an M&A activity can promise substantial growth and competitive advantage to a company/business, but despite that most mergers fail to achieve their objectives.
According to the Pepperdine Private Capital Markets Project in 2017, 27% of transactions had failed to close substantial deals. Not only this, but a report by Forbes also suggested that around 83% of acquisitions had to struggle to raise their shareholder value. The numbers and statistics sound scary but time and again they have been able to prove that M&A can prove to be a very risky endeavor if we do not plan it with appropriate measures.
Mergers and acquisitions are long and complicated processes, and there’s a lot that can go wrong while negotiating a deal. Therefore, it is equally important to measure and take appropriate steps and realize where M&A deals can go wrong and what consequences each move might have before the commencement of the deal process.
Keeping this in mind, we have tried to list some important pointers which can prove to be an obstruction in the deal-making process if not taken care of. By examining some of the most common causes of these failures, we may take proactive steps to increase the chances of success, both in terms of closing the deal and securing a deal that benefits all parties.
Overpaying and Over Estimating Synergies
This is possibly the most common cause of deal failure. The majority of appealing target businesses operate under the premise that “everything is for sale at the right price.” This effectively translates to “if a buyer is willing to overpay, the company is still for sale.” This typically entails a premium over the stock price of publicly traded firms.
In small, privately owned businesses, there’s no reason to believe it’s any different. To reduce the chances of overpaying, buyers should set a cap before beginning negotiations and stick to it.
Similarly, if we talk about over-estimating synergies, they are almost often accompanied by overpaying in a deal. Overestimating the deal’s synergies is often the first step towards overpaying. While the notion that certain costs will effectively remain the same when two firms merge is appealing, it’s much more difficult to accomplish in reality than most executives admit. Revenue synergies are no less difficult to achieve. As a result, M&A professionals should be wise to examine possible synergies from a deal through quite a conservative lens.
Inadequate due diligence
The necessity of due diligence cannot be overstated, partially because many companies seem to be eager to get it over with as quickly as possible. One of the most significant issues that occur during the acquisition phase is that the acquirer is reliant on the target company to provide knowledge that isn’t always favorable for their management. This causes obvious problems for the company. As a result, the more unflattering the details, the more probable the target company’s team would withhold and/or explain it away. In extreme situations, this can result in the failure of the transaction in the long run. Some important points during the pre-due diligence phase might also help in doing a better due diligence process and they must be considered. For example, asking questions like ‘Does the target fit within the company strategy? Are there alternatives to M&A or that strategic intent? How does the target rank vary from any other potential targets?’
Lack of Cultural Integration
Mergers and acquisitions (M&A) can help a company grow, add value, gain access to new markets, and develop a global presence. Although mergers and acquisitions can benefit the businesses involved, many have resulted in a loss of value for shareholders and in a majority of cases, lack of cultural fit or cultural clashes between the companies prove to be one of the major reasons causing the fallout.
Cultural incompatibility is a common reason for failed transactions. In such situations, employees can feel alone, unsupported, and uncertain about their future after a merger. This ambiguity can stifle or even derail any deal’s benefits.
Acquirers must put cultural considerations first from the start if they want the deal to be successful.
Talking about an example, the Daimler Chrysler case exemplifies the difficulties that come with cultural and integration problems. This factor is also noticeable in global M&A transactions, and a proper strategy should be formulated to either go for hard-decision forceful integration while ignoring cultural differences or to enable regional/local businesses to operate their respective units with specific goals and profit-making strategies. Meanwhile, companies should also try and strive to create a modern organizational culture based on a common collection of values, principles, and assumptions which can help them in the future.
A poor Integration process and lack of a strategic plan
Post-merger integration is a big obstacle for any M&A transaction. A thorough evaluation will aid in the identification of key personnel, critical projects/products, and sensitive processes and matters among other things. Using these defined critical areas, efficient processes for clear integration can be planned, with the assistance of consultancy, automation, and even outsourcing options being thoroughly explored.
Having a good strategic plan can be a part of the integration process. A good rule of thumb here can be that the more complicated the transaction’s motivation is, the more likely it is to fail. We should start the process of the deal by making small but effective steps. Market share should be a strong motivator; being a business visionary should not.
External / Exogenous factors
Anything outside of the manager’s control is referred to as external factors (also known as exogenous factors or simply risk). The year 2020 serves as an excellent example. Assume that the executives of two hotel chains are considering a merger. On almost every level – economical, cultural, and strategic – it makes sense. Since there is no geographic overlap, regional hotel chains are merging to form a national chain.
It appears to be fine on paper. As soon as the agreement is completed, a global pandemic breaks out, tourism ceases, and money runs out. So, some external conditions that few could have predicted, resulted in the deal collapsing. In most cases, external factors may not be entirely controllable, but the safest option for companies facing this crisis should be to look ahead and cut more losses, which may entail completely closing down the company or taking similar hard decisions. Therefore, the company needs to consider all the probabilities from day one if they are looking for a merger or an acquisition ahead.
Lack of Supervision/ Management
The most apparent cause of failure is postponed until last. Management involvement is a catch-all response that frequently includes most of the other concerns on this list. From the hunt for a suitable target company to the incorporation of the two firms into the newly established entity, no stage of the M&A process can handle itself. Managers who prioritize other activities in their business over the effective execution of an M&A should not be surprised when their deal is ultimately considered a failure.
The amount of upheaval involved in M&A, as well as the effect on organizations going through such a transition, can be significant. However, there is the potential to make a meaningful, long-term shift that will put an organization on the road to substantial future success. For several businesses, now is the ideal time to implement change and generate new and additional value but you cannot master the art of getting better at something until you realize where the loopholes lie and how harmful they can be, right?
This is where we come into the picture!
Mergerware is a user-friendly and easy-to-use platform for easy adaption to an M&A integration team. Our software offers coverage and support for the entire M&A deal lifecycle, eliminating the need for businesses to use another platform. The platform is also straightforward to configure to the customer’s needs, and the customers can do the majority of the configuration without any expert knowledge.
Built by M&A experts MergerWare’s robust M&A framework is built on a platform that enables businesses to quickly begin their M&A process without completing their M&A process/Playbook.
Our company’s all-in-one M&A software makes it simple to fine-tune layouts based on industry information and lessons learned, giving teams an end-to-end approach for deal management transactions and similar organizational growth actions.
If your company is looking for a successful M&A deal, right from identifying a potential target for the deal, to making a strategic plan for the execution of it while eliminating all the existing loopholes that fall in the way, our years of professional experience in deal-making can prove to be one of the most powerful weapons for you.
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