Mergers and acquisitions (M&A) are a part of the natural life cycle of a business. They are strategies used for different purposes including increasing the current products or services offered, consolidating supply chains, improving logistics and reduce cost or expand the offerings completely by merging with a different industry.
You can check out our recent blog on “How to prepare for mergers and acquisitions” here.
Whatever the reason for the merger, many business owners do not understand the risks associated and unfortunately cause the acquisition to fail. This article will discuss why mergers and acquisitions fail, what to do when they fail, and how to avoid failure in the first place.
Reasons Why Mergers And Acquisitions Fail
Poor assessments of the target company
Mergers and Acquisitions can fail due to poor assessment, this can happen when there is a disconnect between how management views the company versus how it might actually look from the outside.
Often potential acquirers might feel they can bring something to the table that the current owners do not but the poor assessment of this can lead to the reality being far from the truth. The impact of this is once the acquisition has gone through the reality of how the acquisition was to grow eventually leads to delays in operations, or costs more than anticipated which eventually leads to the deal not being financially viable.
Poor assessments can also be attributed to bad communication, where important information is withheld or provided inaccurately, which could include key KPI’s such as growth rates, trends, customer satisfaction, inventory levels etc. Analysis of this information is vital as if the acquisition is to be a success, you must first see how the business is currently run, to understand where the opportunities lie. If the information ‘today’ is incorrect then it can lead to bad decisions for the overall M&A.
Loss of stakeholders engagement
One of the most common reasons for partnerships breakdown is a lack of executive support from the companies involved. If portfolio managers, directors, and even middle management were not on board prior to entering into a merger or acquisition agreement then it’s likely that they will lose interest quickly as the project progresses. When management is disengaged from a project this often discourages employees at all levels which can have a domino effect with stakeholders veering away from the program. Not only will efficiency decline but the enthusiasm with regards to the outcome will become rather dull for those involved.
It is important to review the management and stakeholders involved in the process to assess whether any third parties might be required. For example, if the business being acquired has a finance team, they could be biased or concerned about the impact of the merger and it might be sort after to get some third party independent advice on the financial trading of a business, however, it will be important to ensure key employees are kept on board, so even if using third parties, communication and involvement with staff will be key to a successful M&A.
Lack of a strategic plan
When a business does not take the time to plan out how it will grow as an organization, failure becomes inevitable. Strategic plans allow for a company to understand what changes need to be made in order to improve and adapt its competitive advantages as well as avoid potential risks.
If you are looking to acquire, whether that be to merge with an existing business or advance after the takeover, you will want to understand where the business itself sees the growth, then layer in your own view on how you think the acquisition will support the growth post-acquisition. If you do not have this plan in detail, then the vision might not be clear and you should step back to create it before you move on with the deal.
Mismatch in corporate cultures
Mismatches in corporate cultures often lead to mergers and acquisitions that eventually fail. Cultural values can vary greatly between organizations, leading one company to take control of another with intentions to change the culture. However, cultural differences are difficult to manage internally and poor management can lead to employees leaving, losing valuable knowledge which then causes pressure on the organization.
It is important to remember that employees who do not align with the new corporate culture will be under great pressure at work; this stress is likely to cause high employee turnover or decreased productivity, therefore to mitigate the risk of cultural differences, a stakeholder analysis should be completed. You should look at every employee involved, who they are and how they impact the business to then look at what you might need to adapt to ensure the cultural change forms part of the overall acquisition process.
Insufficient due diligence
The acquisition of a company by another is intended to benefit both parties, although that doesn’t always end up being the case. The seller waits for their payday while the buyer waits patiently for the honeymoon period to end, which ultimately ends in disappointment because implementing changes, merging corporate cultures and integrating fragmented management are all much more difficult than anticipated.
One of the main reasons a merger or acquisition can fail is because the acquirer does not do sufficient due diligence when they’re in the initial stages of discussions. When buyers become too fixated on thinking about their own needs and what they need from a target company, it’s easy to lose sight of why the seller is willing to sell in the first place.
It’s very common for companies to focus on the problems and challenges of a merger and acquisition without doing proper due diligence or planning. If you don’t do enough research and planning, you may spend large amounts of money on an unsuccessful M&A process.
Poor Integration Process
Unfortunately, all too often, mergers and acquisitions fail because the integration process is not managed correctly.
Management expects a deal to go smoothly from the very beginning when in reality there is a lot of chaos that comes from masses of decisions that have to be made very quickly. Moreover, integrating people from two different companies has never been an overnight task and requires a great deal of understanding. If you’re looking to expand your business by buying out another company or being bought out, then prepare for the long haul and think before you act.
Legal documents have a tendency of being skewed towards whoever wrote their sections in the beginning. Factor in time delays with negotiation processes and the paperwork involved in making everything official – this takes time during which a benefit can easily be lost in translation between two different companies; devaluation of assets; a combination of management styles; lack of focus on vision; confusion over priorities; competitor takeovers; misalignment of mission statements or earnings expectations devaluing future earnings potentials.
Points to consider before starting a merger or acquisition
- They should be aligned strategically from the outset.
- They should be complementary enough because it will be difficult to scale if they are not.
- They should ideally have compatible cultures, however if not this should be identified early on so the implementation runs smoothly.
- They need strong leadership that can navigate through sticky decisions made by different stakeholders in critical areas.
- They need detailed financial due diligence to assess the information of the business being acquired. This should ideally be a two year back and 5 year forward forecast.
Mergers and acquisitions are difficult to pull off for one reason or another. Sometimes, it is because the company has not executed its plans flawlessly. Other times, it is because the merger isn’t what was sold to shareholders. It’s never easy to merge two companies together, but there are some things that can make them more likely to succeed.
To ensure a smooth and successful transition, we can help by identifying and quantifying all risks associated with a merger or acquisition and provide strategic solutions that can help mitigate those risks. Our experienced team of professionals will carry out comprehensive due diligence to assess the value of the deal and support the strategic planning process, ensuring you have confidence the deal is viable.
In order to avoid the pitfalls that usually come with M&A, contact the financial experts at Wilkinson Accounting Solutions for professional help and advice.