According to a KPMG study, attempted mergers have a failure rate around 83 percent. Other research shows a different rate of failure, but it's always above 50 percent, which means you're up against some serious challenges when you step into the M&A waters. CEOs and companies that want to hedge as many bets as possible can learn from common M&A mistakes so they can avoid or mitigate as many hurdles to success as possible.
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1. Letting desire for a deal trump business (and common) sense
One of the biggest mistakes any company, investor or CEO can make when dealing in business transactions is letting excitement or desire for the deal outpace realism. No matter how desirable a company might seem, if it doesn't make financial, legal or technological sense to bring it into the fold, the acquisition may fall through or end up being more expensive than planned.
2. Not paying attention to regulations
You can't force a merger if regulations won't allow the resulting company or entity, which means you need to have a strong grasp of the compliance environment in your industry. One example of a merger that potentially fell flat due to regulator pressures was between Walgreens and Rite Aid. The full merger would have created a potential anti-trust issue, allowing one company to corner an enormous part of the drug-store market. The Federal Trade Commission eventually approved of a smaller purchase, which involved Walgreens buying around 40 percent of existing Rite Aid stores. But that didn't happen before Rite Aid shares took a roller coaster ride due to the uncertainty.
3. Failure to hire the right specialty teams
The smallest misstep during M&A activity can lead to disastrous drops in shares, failure of the merger, or trouble after the acquisition. Putting the right professionals and specialty teams in place can help you avoid such missteps. Before talking M&A with anyone outside your company (and even with most people in your company), hire and discuss plans and options with the right lawyer and accountant. Other members of your team that can be critical during M&A transactions include finance department members at all levels, communications teams, and PR professionals.
4. Incomplete due diligence
Failure to conduct deep due diligence has bitten more than one major company looking to score a deal. Before moving forward with any M&A activity, you definitely have to look under the metaphorical rugs and in the virtual dark corners of the other house. Surprises after the fact can make the transaction more expensive than planned, even leading to business loss or bankruptcy in extreme cases. Consider Bank of America's purchase of Countrywide Financial Corp. in 2008. BoA acquired the other company for only $2.5 billion, which seemed like a coup of a deal until things went sour. Ultimately, the acquisition cost BoA more than $40 billion in legal settlements and real-estate losses.
5. Not ensuring all the right assets are compatible
Finally, you must ensure that plans for after the merger or acquisition are likely to succeed. More than one merger has gone astray simply because the two companies couldn't integrate their technologies as planned. In 2005, for example, eBay bought Skype, paying $2.6 billion for the tech firm. Because the two companies couldn't end up integrating technology as planned, eBay sold Skype for $1.9 billion in 2009.