Merging with, or acquiring, another entity is always going to be a risky venture no matter how extensive the negotiations and due diligence process are. As with any major purchase, issues may not be clear until after the fact, and a lot of things can happen once everything is already said and done that may end up destroying any potential value before it is even realized. Here are six common reasons that M&A deals fail:
Inaccurate Data and Valuation Mistakes
Overly idealistic valuations and lofty projections are frequent culprits in a deal’s demise. Granted, the parties to a prospective deal want to do everything possible to make it happen. Unfortunately, this often means that the financial matters are calculated and analyzed rather “creatively” to make them as enticing as possible. Although it is understandable that parties want to present the numbers assuming the best case scenario, when it becomes evident that reality is well below what was presented, it could prove fatal.
Insufficient Owner Involvement
During the negotiations, it is quite common for seasoned professionals to oversee most of the key issues. Some leaders may stay involved in the process, but plenty are so busy running the company and thus allow the experts to handle most of the work. The problem with this is that once those experts are out of the equation and it is time for the newly formed entity to move forward, the leadership may not have adequate insight with respect to existing circumstances and expectations.
Merging entities on paper is often far easier than merging them operation, culture, and personnel-wise. Things can get particularly dicey if there is not a concrete plan in place for the integration and/or there is inadequate communication from the higher ups to middle management. The uncertainty of a merger or acquisition often erodes morale, which can easily disrupt productivity and efficiency. These sorts of integration obstacles have to be evaluated beforehand and must be handled delicately.
There has to be sufficient resources available, both human and financial capital, for a newly formed entity to overcome the challenges of integrating the two distinct companies and cultures. There will likely be a need for new staff, updated policies and procedures, extra real estate space, and so much more, the additions of which will no doubt require the investment of quite a bit of time and money. Hopefully, this is something that is considered and planned for well in advance, but unfortunately, that is not always the case.
Unexpected Economic Factors
Even the best laid plans can go awry if the economy experiences sudden, drastic changes that affect stock prices and interest rates. A negative economic climate will undoubtedly interfere with the success of mergers and acquisitions, regardless of how well they were expected to perform.
Lack of Planning and Strategy
For the most part, the aforementioned issues that are often responsible for a deal’s failure can be avoided, at least in part, with proper planning and the creation and execution of a coherent strategy. For many M&A deals, the main focus is on getting the deal closed, but not enough attention is paid to preparing for the aftermath. This lack of foresight makes it far more likely for even the smallest of issues to get in the way of the deal’s true potential.