8 Reasons M&A Deals Fall Through

By Marv Dumon AAA

Mergers and acquisitions (M&A) is an important way for companies to grow and become stronger and better organizations. Large corporations typically hire ivy-league graduates replete with shiny resumes to run a corporate development or M&A team. This post is highly visible within a company, and is often a training ground for the company's future CEO, CFO, division president or other c-level executive.

Still, bad deals happen, and this often means a major loss in value for shareholders. Anticipated synergies may not materialize, the two entities may clash, cost savings projections may be overstated or turf wars may ensue. Here are eight common M&A mistakes that can wreak havoc on shareholders' portfolios.

Pitfall No.1: Smart people are working up this deal - it must be a good one.
Just like with national security, where citizens forget the armed forces or the intelligence community when no attack takes place, a similar human tendency occurs in corporate finance and M&A. Employees and deal champions are not celebrated when a deal is killed. In fact, the hundreds (and often times thousands) of hours spent on a deal are often viewed as a tremendous waste of time if the deal does not go through.

Investment bankers, corporate development officers, transaction professionals and consultants are heavily compensated when deals close. Massive bonuses are paid out. Glory, visibility and promotions are doled out when a transaction closes. Hourly professionals get lots of billable hours. Just because a lot of people are pushing for a deal does not mean there are no strategic, operational and financial pitfalls that make a prospective deal a bad one. (Interested to learn more? Check out The Basics of Mergers and Acquisitions.)

Pitfall No.2: There seems to be one good reason to do this deal.
When contemplating a business combination, there should ideally be multiple compelling reasons to do the deal. Management cannot simply rely on projected cost savings from the elimination of redundant jobs. Besides, there is only so much cash to be saved from cost-related synergies. The most attractive deals focus on growth of revenue and profitability.

For instance, an acquirer with superior products and services can buy another company with access to major and global customers. Such a move can translate to strong growth for the newly combined entity for years to come. In another instance, the acquiring company can buy a target company in a region or market that offers potential for high growth. Buying a target should make an acquiring company a lot stronger, not just theoretically stronger. Too much capital, reputation, cost and effort go into putting together a deal to achieve just meager returns, if any at all.

Pitfall No.3: The balance sheet is not overflowing with cash, so a good deal is put off.
If the company's stock has a high price, it can use its equity to purchase the shares of the target company. This can be excellent way to execute an acquisition, especially if the target's shares are trading at a low multiple.

If there is liquidity in the markets, the company can raise money for an acquisition by selling equity or by issuing bonds. Alternatively, there are numerous investment firms willing to loan the funds necessary in order to make a deal push through. Once the synergies are realized (after the transaction), the company can regain the cash in order to pay back such loans. (For more on this logic, see Why do companies issue bonds instead of borrowing from the bank?)

Pitfall No.4: The company appears to have healthy deal flow.
No single investment bank, professional services firm, private equity group or company sees all the deal flow that surface in any given year. An important metric for deal professionals is quantity of deal flow. If they wish to review more prospective deals, they should establish and maintain good relationships with investment banks, industry insiders and services professionals.

Once the message is out that the company is looking to acquire complementary entities, people will approach - and too often overwhelm - the corporate development officer with ideas. Unfortunately, the deal champion too often will be presented with bad ideas. That comes with the territory. It is helpful to have a summary of the company's acquisition criteria readily available. Solid rapport with positioned industry insiders can help generate quality deal flow. Additionally, contacts from distant regions can be especially helpful if those regions present growth opportunities for the acquiring company.

Pitfall No.5: The CFO or general counsel are can act as M&A champions.
CFOs, general counsels, controllers and other key members of the leadership team are already swamped by their full-time jobs. Tasking them to head M&A initiatives can lead the company to miss out on good acquisition opportunities. They simply do not have time to do the job properly.

It is preferable to have a dedicated and focused corporate development officer. When things get busy, third party advisors and consultants can be hired to shore up resources. The deal champion should also have enough rapport with the company's division managers, accountants and lawyers in order to secure their commitment once there is a prospective deal. These professionals also have full-time responsibilities. However, their involvement is critical at several stages of the M&A process. (This exciting sector demands a lot from its advisors. If you're interested, check out Acquire A Career In Mergers.)

Pitfall No.6: The information provided by seller has not be thoroughly analyzed.
For a variety of reasons, sellers can provide inaccurate numbers or a rosy future for their business. Potentially significant liabilities and risks may not be presented. For instance, there may be environmental problems within the target's facilities; possible new products may possess inherent defects. There might be unusual risk of litigation. Proper due diligence is critical for the vast majority of deals.

Fortunately the buyer can exercise caution and thoroughness during the review phase and put in place the correct people to properly assess the target. Subject matter experts can be brought in to mitigate risks facing the buyer. Additionally, management can proactively communicate with its customers and employees - when appropriate - to provide assurance that the deal strengthens the company and improves the lot of its various stakeholders.

Pitfall No.7: The decision becomes a strictly a left-brained process.
Deal professionals will assess a voluminous amount of information to include a variety of models, valuation analyses, charts and graphs. It is easy to treat a prospective transaction as purely a mechanical, scientific process. However, the people aspect and "art side" of any deal are always critical.

Cultural congruence can provide that extra assurance that combining two companies make sense. Deal professionals must establish and continue to maintain a rapport with a variety of personalities and exercise tact despite the long hours involved. After all, the owners of the target company do not have to sell the company to a prospective buyer.

Deal-making involves a long and tedious courtship, and successful M&A champions understand this, but good deals can collapse as a result of unnecessary and avoidable ego clashes. (For more on art and uncertainty involved, read The Wacky World of M&As.)

Pitfall No.8: There's no post-integration plan.
The time to put in place a post-integration plan is prior to closing, not after closing. The buyer's management team should set a roadmap complete with action items, people responsible and timetables for achieving the goals set forth in the roadmap. For value to be created after the transaction, management and employees must execute and realize the revenue and cost synergies forecasted for the deal. Ideas must now transition into action and results. Ultimately, in order for the deal to make sense, the newly combined entity must be successful in gaining stronger positioning within the competitive dynamics of its industry.

The Bottom Line
Many studies have shown that only about half of acquisitions are considered successful. Management and employees must work together with the newly acquired entity to realize the various strategic and operational synergies the company expects out of the deal. (If you are on the outside, learn how to invest in companies before, during and after they join together, in The Merger - What To Do When Companies Converge.)

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