Why do M&A deals fail?

Last updated on June 26th, 2023 at 10:48 am

INTRODUCTION

Mergers & Acquisitions are corporate deals when two or more companies join hands together to become one. These deals are usually multi-billion dollar deals and require a great deal of diligence before the closure of the deal. The main purpose of any M&A is growth by acquiring a competitive or complementary brand or company to increase product range, market share, customers and ultimately profitability.

But inspite of all diligence many M&A deals fail, usually due to these reasons:

Unrealistic Expectations

Misvaluation or unrealistic expectations on the part of both the seller and the buyer is one of the major reasons for a M&A deal failing. The company’s assests and financial valuations may look good or attractive apparently, but a closer scrutiny may prove it to be otherwise.

Poor Integration Process

The biggest challenge for any M&A deal is the post-merger integration of key employees, major on-going projects, crucial products, sensitive processes and issues, probable bottlenecks that may impact the company’s functioning. This requires a careful appraisal of these critical areas. Efficient processes should be devised for smooth integration by exploring options of automation, consulting and even outsourcing, if need be.

Cultural Integration Problems

With global M&A being a norm nowadays, inherent cultural integration of different work cultures across various regions of the world proves to be a major issue that needs to be tackled very deftly. This demands devising of a proper strategy which could either be forceful integration and implementation of policies or adoption of a more genial policy of allowing the regional business perspectives run the units with clear targets of profit-making.

Capacity Building

If the M&A is done with the purpose of capacity expansion, then a thorough assessment of the current firms capacity has to be done. Are its current resources already fully or underutilized?; has provision been done for allocating additional financial and other resources?; have you accounted for time, money and effort for any unknown challenges that may crop up in the future?.

Hidden Debt, Financial Instability and High Recovery Costs

This is one of the major causes of failures of M&A deals. High costs towards expected integration prevents the deal from going through. It requires astute strategies with ready resources to withstand potential costs and challenges of integration. These costs take several years to be recovered.

Inaccurate Financials that leads to Negotiation Errors

Overpaying for an acquisition is one of the major reasons that lead to financial losses and consequently failure of an M&A.

External Factors

Certain external factors like a complete collapse of a sector due to a turn of its business cycle are factors that are beyond ones control, that also results in a lot of M&A deals failing.

Limited Owner Involvement

Appointing high cost M&A advisors is mandatory nowadays for any M&A deal. But leaving everything to them is a huge mistake as they have a limited role in the deal and post the deal the onus is completely on the new owner. Advisors should be assigned assistance roll only.

Lack of Communication

Communication begins with how your company is represented to buyers at the time of introductions. It becomes more intense during the negotiations of an LOI and finally during closing. Breakdowns in communication can jeopardize a deal at any of these stages.

Maintaining consistent, transparent communication throughout the due diligence process can support a smoother experience. Expectations should be made clear between the buyer and seller, better ensuring that each of their priorities for the future are aligned. This can help avoid future culture shocks.

Poor Representation

Always use the services of a lawyer specializing in M&A. Not doing so will result in making the process painfully confusing, time-consuming, and frustrating, often causing the deal to fail.

Make sure that you have someone in your corner who knows the legal pitfalls and vulnerabilities you will come across during the final stages of a deal. This will help ensure you receive the most protection while understanding the nuances of the legal jargon.

No M&A deal can guarantee 100% success hence when conducting an M&A deal one should be very wary and watchful of the above pitfalls that can contribute to your M&A deal failing. Creating a positive corporate environment, implementing (and enforcing) sound policies and processes, and outlining vital steps for due diligence can help accomplish a successful M&A.

In the end, while there’s a lot that’s outside your control in M&A deals, you can increase the odds of success by focusing on those factors that you can control.