10 Reasons Why M&A Transactions Fail
According to a recent article by the Harvard Business Review, between 70% and 90% of M&A deals fail. Evidently, the odds are stacked against you when trying to seal a deal. Even the most experienced acquisition teams can struggle to satisfy both parties.
Many factors contribute to this statistic. Read on for more information on the top 10 reasons why M&A deals fail.
10 common reasons why mergers and acquisitions fail
Without a doubt, overpayment is the most common reason for failed M&A deals. Companies assume that anything can be purchased — for the right price. If the buyer looks as though they’re paying a premium, the target company will definitely oblige and sell.
However, it is important that buyers set their maximum price before negotiations to reduce the chance of paying more than the desired business is worth.
2. Overestimating synergies
When one company overestimates synergies, they usually end up overpaying in the entire deal. If the cooperative energies aren’t as financially viable as first thought, the deal can be deemed a failure.
It is good practice to estimate the synergies and then half them. If the partnership still looks fruitful, the deal more likely to succeed.
3. Inadequate due diligence
We cannot stress the importance of due diligence. Most problems arise because proper and exhaustive research and analyses have not been undertaken. If the acquirer does not have the correct information regarding the target business, they will run into numerous agency problems.
Companies may withhold certain information that does not paint their business in the best light. As such, if a deal is struck, the acquirer may feel that the transaction was a failure — when they discover these issues.
4. Misunderstanding the target company
Sometimes, an acquirer simply does not fully understand the target company, despite sufficient due diligence. Many acquirers do not understand how to get the most out of their acquired company following a transaction. This is sometimes the cause for overestimated synergies.
5. Insufficient strategic plan
Any M&A deal needs a comprehensive and well-thought-out plan to be successful. The acquiring company needs to ask themselves why they want the deal and develop a justifiable motive for purchasing the target. If they cannot produce a viable answer, the deal often fails.
6. Inability to acknowledge contrasting cultures
Underestimating the cultural differences between two companies often results in the loss of millions (if not billions!) of dollars. The acquiring company needs to bridge the cultural gap between itself and the target company. A change manager can help oversee the process and eliminate this issue.
7. Overextending resources
More often than not, buyers will target smaller companies. This is usually seen as the best type of transaction. However, if you commit too many resources to a deal, it can become costly. When the company makes a smaller acquisition, they do not have to integrate or acquire many assets.
8. Wrong phase of the industry cycle
Humans have an uncanny inability to overestimate and underestimate change. As a result, it is difficult to predict the direction of a company.
Failure to see long-haul shifts can catch the most competent M&A managers unaware, which eventually leads to the breakdown of the transaction.
9. External (or risk) factors
Quite simply, no one can predict the future. There are so many external factors that can affect the health of your company. Economic instability, pandemics, and changes in consumer trends can all spell disaster for an M&A.
10. Lack of management involvement
If a manager does not take a hands-on approach in the implementation of an M&A transaction, they should not be surprised when the deal fails.
How to make M&A deals successful?
As you can see, an M&A is a tricky transaction to pull off. If you want it to be successful, you have to get everything absolutely perfect. Even then, the deal could break down and get abandoned because one of the companies had a change of heart.
However, if an acquirer keeps the above factors in mind, they stand a better chance of closing the deal.