Consider the scenario of buying a used car – you can take a few test rides, carefully examine the exteriors and interiors and take assistance from trained mechanics to assess the car. 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&A deals also follow similar challenges. You can examine the existing business based on visible financial numbers, assumptions of potential fit and 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.
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 the failure of any M&A deal. The FT Press book states that "Many research studies conducted over the decades clearly show that the rate of failures is at least 50 percent."
Reasons Why Deals Fail
- Limited or no involvement from the owners: 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, till 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 assistance role. Among others, the inherent benefit will be a tremendous knowledge-gaining experience for the owner, which will be a lifelong benefit.
- Theoretical valuation versus practical proposition of future benefits: 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.
- Lack of clarity and execution of the integration process: A major challenge for any M&A deal is the post-merger integration. A careful appraisal can help to identified key employees, crucial projects and products, sensitive processes and matters, impacting bottlenecks, etc. Using these identified critical areas, efficient processes for clear integration should be designed, aided by consulting, automation or even outsourcing options being fully explored.
- Cultural integration issues: The Daimler Chrysler case is a study of the challenges inherent in cultural and integration issues. This factor is also quite evident in global M&A deals, and a proper strategy should be devised either to go for hard-decision forceful integration setting aside cultural differences or allowing the regional/local businesses run their respective units, with clear targets and strategy on profit making.
- Required capacity potential versus current bandwidth: 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 time, effort and money needed for unknown challenges which may be identified in the future?
- Actual cost of a difficult integration and high cost of recovery: The Daimler Chrysler case also ran up high costs toward the expected integration attempts, which could not sail through. Keeping bandwidth and resources ready with correct strategies which can surpass the potential costs and challenges of integration could have helped. Investments today in a difficult integration spread over the next few years may be difficult to recover in the long run.
- Negotiations errors: Cases of overpaying for an acquisition (with high advisory fee) are also rampant in executing M&A deals, leading to financial losses and hence failures.
- External factors and changes to the business environment: 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 taking similar hard decisions.
- Assessment of alternatives: Instead of buying to expand with an aim to surpass competitors, is it worth considering being a sale target and exit 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 more than 50% of M&A deals failing, it’s always better to keep a backup plan to disengage in a timely manner (with/without a loss), to avoid further losses. The above-mentioned examples although are cited as failed, but they do seem to have executed the de-merger in a timely manner.
The Bottom Line
Businesses (large or small), desirous of potential benefits from merger and acquisition, cannot get a 100 percent guarantee that ensures success from M&A deals. The majority of the M&A deals result in failure due to the above factors. Business owners, advisors, and associated participants should be vigilant about the possible pitfalls.