Mergers and Acquisitions are inherently risky business transactions. An estimated 83% of M&As fail to provide shareholder value. Although there are many reasons for this high failure rate, here are a few common causes that thorough due diligence process, thoughtful strategy and responsive can planning address.
Inadequate Due Diligence
This one might seem obvious, but often the pre-deal due diligence process is rushed or completed by teams unfamiliar with the relevant industry, internal dependencies or business objectives. The due diligence process is designed to uncover the “truth” about the selling company, but truth is often in the eye of the acquirer. More accurately, the truth is in the eye of the managing team charged with making the deal work. It is important that this team is intimately involved with the due diligence process. Use clear M&A objectives define the “truth” during due diligence.
Cultural Mismatch
An M&A is about more than acquiring assets to add competency; it is about merging companies that each have existing policies, employees, and relationships – both organizationally and personally. Even in M&As that don’t cut jobs, redundancies can result in disengaged employees and morale can suffer. Whether the strategy aggressively assimilates two cultures into one or allows separate business units to operate independently, a clear strategy for integration must be mapped out before the merger.
Overpayment & Overvalued
It is in the interest of management to obtain the highest possible bid for their company before selling it, so valuations start inflated. Additionally, these valuations are based on the total value of the company, not its value to prospective buyers. The valuation of a company does not directly translate to how much value it will add to an existing entity. As such, companies must distinguish between valuation and the expected value-add.
Overstretched Resources
In a sort of twisted logic, M&As can result in redundancies in some areas while also overburdening other resources. The risk of overloading is especially high for those charged with the task of managing the integration. Integration typically draws on resources across multiple departments, not just the “integration team.” Company-wide resources should be invested in the success of the M&A, and department and employee objectives should reflect that. It is not enough to have a resource plan leading up to the M&A; it is important to be responsive to blind spots and challenges as they arise after the merger.
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