Consider the scenario of buying a used car—you can take a few test drives, carefully examine the exterior and interior, and get the assistance of trained mechanics. Despite all due diligence, the reality of the used car—whether it’s a good buy or a lemon—will be evident only after you purchase it and ride it for some period.
M&Adeals also follow similar challenges. You can examine the existing business based on visible financial numbers, assumptions of potential fit, and leverage advisory assistance from M&A advisors (the experts). But the reality will become evident only when the deal is through and you have to run the business forward.
Key Takeaways
- Mergers and acquisitions (M&A) are deals where two (or more) companies join together as one.
- These multi-million or billion-dollar deals require a great deal of due diligence before the deal is closed.
- Nevertheless, M&A deals do fail, whether it be due to cultural differences or integration issues, among other things.
M&A Deals
The broad purpose of any M&A deal is twofold:
- Growth from acquiring new products, markets, and customers.
- Increased profitability based on the strategic potential of the deal.
Losing the focus on the desired objectives, failure to devise a concrete plan with suitable control, and lack of establishing necessary integration processes can lead to . Harvard Business Review estimates between 70% and 90% of acquisitions fail.
Why M&A Deals Fail
Limited Owner Involvement
Appointing M&A advisors at high costs for various services is almost mandatory for any mid- to large-size deal. But leaving everything to them just because they get a high fee is a clear sign leading to failure. Advisors usually have a limited role, until the deal is done. Following that, the new entity is the onus of the owner.
Owners should be involved right from the start and rather drive and structure the deal on their own, letting advisors take the assisting role. Among many other benefits, the inherent benefit will be atremendous knowledge-gaining experience for the owner.
Misvaluation
The numbers and assets that look good on paper may not be the real winning factors once the deal is through. The failed case of Bank of America’s acquisition of Countrywide is a typical example.
Poor Integration Process
A major challenge for any M&A deal is the post-merger integration. A careful appraisal can help to identify key employees, crucial projects and products, sensitive processes and matters, impactful bottlenecks, etc. Using these critical areas, efficient processes for clear integration should be designed, aided by consulting, automation, or even outsourcing options.
Cultural Integration Issues
There arechallenges inherent in cultural integration and a proper strategy should be devised. One option is to go for a forceful integration, setting aside cultural differences, and the second is to allow the regional/local businesses to run their respective units.
Large Required Capacity
The deals with the purpose of expansion require an assessment of the current firm’s capacity to integrate and build upon the larger business. Are your existing firm’s resources already fully or over-utilized, leaving no bandwidth for the future to make the deal a success?
Have you allocated dedicated resources (including yourself) to fill in the necessary gaps, as per the need? Have you accounted for the time, effort, and money needed for unknown challenges that may be identified in the future?
Note
One of the most catastrophic M&A failures was the merger between AOL and Time Warner.
High Recovery Costs
Keeping bandwidth and resources ready with the correct strategies that can surpass the potential costs and challenges of integration can help an M&A deal find success.
Negotiation Errors
Cases of overpaying for an acquisition (with high advisory fees) are also rampant in executing M&A deals, leading to financial losses and hence failures.
External Factors
The Bank of America/Countrywide failure was also due to the overall financial sector collapsing, with mortgage companies being the worst hit. External factors may not be fully controllable, and the best approach in such situations is to look forward and cut further losses, which may include completely shutting down the business or making similar hard decisions.
Assessment of Alternatives
Instead of buying to expand with an aim to surpass competitors, is it worth considering being a sales target and exiting with better returns to start something new? It helps to consider extreme options which may prove more profitable, instead of holding onto the traditional thoughts.
Backup Plan
With approximately 70% to 90% of acquisitions failing, it’s always better to keep a backup plan to disengage in a timely manner (with/without a loss), to avoid further losses.
What Was the Largest M&A Deal Ever?
The largest M&A deal ever was that of Vodafone acquiring Mannesmann in 2000. The deal was valued at $203 billion. Vodafone is a U.K.-based mobile provider and Mannesmann was a German industrial conglomerate.
What Is the Difference Between a Merger and an Acquisition?
While both a merger and an acquisition entail two companies becoming one, there are differences. A merger is when two companies combine to form one new company. It is a much more equal process, for the most part. An acquisition is when one company buys another company. Often, the company that was bought, ceases to exist.
Is M&A the Same as Investment Banking?
M&A is a part of investment banking. Investment banking involves a variety of different types of activities, one being mergers and acquisitions (M&A). Many investment banks focus solely on M&A business. Larger investment banks, however, offer far more services, such as underwriting for initial public offerings (IPOs).
The Bottom Line
Businesses (large or small), desirous of potential benefits from merger and acquisition deals, cannot get a 100% guarantee of the deal's success. The majority of the M&A deals fail due to theabove factors. Business owners, advisors, and associated participants should be vigilant about the possible pitfalls.
