If one were to write about all of the acquired companies whose value was later written off, it would be enough to fill the Library of Congress.
The vast number of failed deals – sometimes cited as being over 50% of all M&A transactions – is a testament to the many problems which can arise during a merger or acquisition. And how even the most experienced companies fail to overcome them.
While the challenges of merging two companies is a long list, below we identify common merger and acquisition problems and their potential solutions.
We, at DealRoom, help companies organize their M&A process and here we look at these M&A issues and provide some pointers on how you can deal with them if (or when) they arise.
Perhaps first, we should review why firms undertake mergers and acquisitions
While each deal has a specific focus or strategic goal, the most common motivations include:
- Increasing market share
- Capturing synergies
- Taking advantage of supply chain benefits
- Diversifying products and/or services
- Increasing value to shareholders
Below, we look at ten broad-based problems and provide some pointers on how you can deal with them if and when they arise.
1. Lacking a good motive for the acquisition
Problems of mergers and acquisitions begin even before a deal takes place.
In a previous article, we discussed how each deal should have a good motive or a good ‘why’.
As soon as you don’t have a good answer to the question ‘why are we doing this?’ the merger or acquisition has just run into its first problem and the chances of others arising are already higher as a direct consequence.
A good way to avoid this issue in mergers and acquisitions from happening is to spend time on strategic planning.
Go back to basics; establish what you want and whether M&A is even the way to go about it achieving it.
2. Targeting the wrong company
This may seem an obvious one, but for something which is supposedly so obvious, every year literally thousands of companies fail to observe it when conducting mergers or acquisitions.
This may be because there’s a bias at the heart of M&A. As soon as we make the decision to acquire a firm, we’re wired to believe that success means closing an acquisition.
That’s simply not true, and therefore, targeting the wrong company has become one of the key issues in mergers and acquisitions.
Success in M&A is acquiring the right firm.
Overcoming this problem may require you to step away from the process entirely if you don’t encounter the right company in your search.
3. Overestimating synergies
In the simplest terms, synergies occur when one plus one is greater than two. This usually means either increased revenue or cost savings which are a consequence of the transaction.
Unsurprisingly, these are a strong motive for many deals, but they’re also commonly overestimated (sometimes by tens of millions of dollars).
This M&A issue is one that cannot be recovered from throughout the rest of the deal’s lifecycle.
To avoid overestimating synergies, conservatism is the best approach. For example, when it seems like you can making savings of a million dollars, divide that number by two.
If you still feel that’s a synergy that makes the deal worthwhile, then it may be worth pursuing.
Without question, the most common problem that arises in mergers or acquisitions is overpaying for companies.
A large part of this is because the mergers and acquisition challenges on this list destroy company value, making an overpayment inevitable.
And there’s another universal problem which stalks transactions – sellers only tell you when you’re not paying enough, but never when you’re paying too much.
A good way of avoiding overpayment is by looking at a suitable value for that firm as a limit, but not a target.
This small but important shift in thinking can end up saving you millions of dollars and overcome the overpayment problem.
5. Exogenous risks
Economic, industry or technological shifts can mean that even the most well-planned deals can fail.
For example, a 2006 article in the Guardian claimed that Newscorp’s acquisition of MySpace for $580 million looked like ‘the bargain of the century.’ It wasn’t the only one.
But all of them failed to count on Facebook overtaking it very shortly after.
Unfortunately, this challenge of mergers and acquisitions often takes teams by surprise.
That’s why it’s a good idea to build conditions into the transaction contract to protect your firm against downside risks such as falling sales, customer numbers or even the termination of important contracts.
6. Losing the trust of important stakeholders
Human capital is a significant part of most modern businesses, and yet many acquirers pay this fact scant attention, leading to more M&A challenges.
Just because higher management is enthused about a merger or acquisition, it doesn’t mean that the staff will be. This goes for people at the top of the company’s hierarchical structure as well as those at the bottom.
Losing the trust of either is a massive problem in mergers and acquisitions.
To avoid this, it’s not enough to be transparent; instead, they’ve got to see that they’ll benefit from the transaction in some way too.
7. Inadequate due diligence
We discussed due diligence in a previous article, outlining the steps that need to be taken to ensure the M&A transaction is a success.
Almost everyone in M&A is aware that these steps should be taken, but shortcuts are still common, therefore, the business community still sees it as one of the most common problems faced in mergers and acquisitions.
Bankers sometimes use the expression, ‘whatever drags get dirty’ around M&A, believing that efficiency is key to successful deal-making.
Efficiency means efficiency, not cutting corners. This problem may be one of the easiest to avoid – there is simply no excuse for not conducting thorough due diligence.
8. Failing to pull out of a deal when all evidence says you should
In the extensive literature on M&A, the value of pulling the plug on a deal is largely overlooked. There’s a temptation to go ahead with a deal after a certain point has been reached.
Maybe you’ve developed a good rapport with the owner of the target company or your banker is telling you that the deal is a guaranteed winner.
Avoid this business merger issue by remembering that the reason you conduct due diligence in the first place is to let you know what you’re buying, warts and all.
If that turns out to be something that you don’t find as attractive as you once did, don’t hesitate in pulling the plug on the deal.
9. Failed Integration
Technically, integration comes after a merger or acquisition, but that doesn’t mean it should be an afterthought. Problems with acquisitions during Integration, which include culture and change management, can create an inefficient and even toxic work environment.
Accordingly, at every stage of due diligence, members of the diligence team need to be taking notes on where various parts of the business can be integrated if and when the transaction is closed.
Integration is not an optional extra and should be seen as a branch of due diligence in its own right integration issues kill deal value.
The best way to avoid a failed integration – which is universally recognized as one of the biggest value destroyers in M&A – is to plan integration in detail before the ink has dried on the deal contract.
10. Neglecting number one
However the M&A process goes or how long it takes, the most important thing is to remember that the priority is your own firm.
Consequently, a list of mergers and acquisitions problems and solutions would not be complete without mentioning the inexperienced practitioners tendency to “neglect number one.”
Making it better is the reason you undertake M&A in the first place, so neglecting your company’s day-to-day operations in favor of deal-making goes against the aim of what you’re trying to achieve in the first place.
In drawn-out deals, managers can take their eye off the ball and miss out on value-generating opportunities for their company that they would have seen had they not been otherwise occupied.
Never neglect number one.
So, with the above mergers and acquisitions problems and solutions in mind, which type of challenge is the hardest to overcome in a merger?
There is not a simple answer to this question, though many practitioners are currently highlighting the importance of integration planning, culture, and change management which means these are very common pain points that companies might not be able to recover from.
There will always be M&A challenges and issues, however, knowledge and education, especially practical lessons from experienced practitioners, can help you avoid some key issues.
You can find such really useful materials on M&A Science.