According to most studies, between 70 and 90 percent of acquisitions fail (Clayton M. Christensen, 2011). Most explanations for this depressing number emphasize problems with integrating the two parties involved. Let’s take a deeper dive into what causes these alarmingly high rates of failure!
Here are four common mistakes on the part of buyers and sellers that can lead to difficult or unsuccessful business acquisitions.
A good M&A strategy can create synergies when companies with complementary products, services, and missions unite. However, a poor M&A strategy will create tensions and failure or lead to the acquirer failing to successfully integrate the acquired company's assets, systems, and brands.
Believe it or not, many investors do not focus on the long-term strategy associated with a merger or acquisition. The logic behind a deal is all too often sidelined for short-term goals and perceptions driven by politics, ego, and self-interest.
An example of a poor M&A strategy is the Bank of America and Merrill Lynch merge in 2008. Months after the announced merger, the two companies had still not decided which executives would run key groups within the firms, such as investment banking, and which of the two company's management models would prevail (PINES, 2019). The uncertainty resulting from this indecisiveness led a lot of Merrill Lynch bankers to leave the company in the months following the merger. Ultimately, these departures destroyed the rationale for the merger.
Culture plays a much bigger role in the success or failure of a merger than expected. When two businesses are merged, it is critical to identify, understand, and manage the organizational culture. Failure to do so can lead to a loss of key personnel, a paralysis in decision-making, and a failure to meet business-critical milestones — severely impacting the success of the integration program and its ability to deliver on expected value creation goals.
According to the Society for Human Resource Management, cultural clashes account for more than 30% of overall failures (Hoffmeister, 2017). Although there are a number of variables outside of a buyer’s control, a focus on realistic and applicable core values, an effective internal communication strategy, and an engaged workforce can help safeguard against the worst outcomes.
Poor due diligence
Due diligence is a process of verification, investigation, and audit of a potential deal or investment opportunity to confirm all relevant facts and financial information, as well as to verify anything else that was brought up during an M&A deal or investment process.
Being unprepared for the due diligence phase is among the most common reasons for botched deals. Many deals end up going pear-shaped because those involved in the deal are reluctant to confront issues head on. All areas of potential liability, therefore need to be acknowledged and investigated.
Conducting due diligence strategically in both a logical and rational way is paramount to ensuring success, as is transparency. Although it may seem counterintuitive, in order to increase trust and iron out any potential issues from the get-go, sellers should guide buyers to areas of potential difficulty rather than wait for them to learn of the issue themselves much later on in the process, which could result in a breakdown of trust.
Not believing time kills deals
Historical data supports that the longer an M&A process drags on, the higher the probability that the deal will not happen, or the terms will worsen. Many unexpected things can happen while the seller waits for another day or week to close a transaction. Additional time creates risks, such as the possibility of losing a large customer, vendors increasing pricing, lawsuits, or natural disasters. All of these scenarios have jeopardized deal closings or led to worse deal economics for the seller. It is important to keep the momentum of the deal, have a sense of urgency in getting things done, respond to due diligence requests, and turn around markups of documents as quickly as possible.
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Check out https://connect.successionlink.com/emerge-b, and learn more about working with us on your M&A agenda.
Clayton M. Christensen, R. A. (2011). The Big Idea: The New M&A Playbook. Harvard Business Publishing.
Hoffmeister, J. (2017). Drooms: The Biggest M&A Blunders And How To Avoid Them. Finance Monthly.
PINES, L. (2019). 4 Cases When M&A Strategy Failed for the Acquirer (EBAY, BAC). Investopedia.