Why So Many Mergers and Acquisitions Fail
Mergers and acquisitions (M&A) can be exciting prospects for businesses, offering opportunities for growth, market expansion, and increased competitiveness.
However, it’s a sobering reality that a significant percentage of these ventures end up in failure. Research indicates that the failure rate for M&A deals ranges from 70% to 90%, highlighting the complexity and challenges inherent in these transactions.
In this blog, we delve into the reasons behind the failure rate of mergers and acquisitions, exploring the common pitfalls and providing insights on how to navigate these hurdles successfully. By understanding the potential pitfalls, businesses can take proactive steps to increase the chances of M&A success and maximise the value of these strategic endeavours.
What are mergers and acquisitions?
Mergers and acquisitions (M&A) are strategic transactions that involve combining two or more companies, or the purchase of one company by another.
In a merger, two separate entities come together to form a new, single entity, sharing resources, expertise, and market presence. On the other hand, an acquisition occurs when one company acquires another, often with the goal of expanding its market reach, diversifying its product or service offerings, or gaining a competitive advantage.
Mergers and acquisitions can take various forms, such as horizontal mergers (between companies operating in the same industry), vertical mergers (between companies in different stages of the supply chain), or conglomerate acquisitions (when a company acquires businesses in unrelated industries).
In the fast-paced world of business, mergers and acquisitions have become common strategies employed by companies to fuel growth, gain a competitive edge, or enter new markets.
To avoid the same mistakes made by many businesses, it’s important to know why mergers and acquisitions often fail. By understanding the most common reasons you can take action to reduce the risk.
To provide you with the support you need, we have outlined some reasons below. By understanding these reasons, you can navigate the challenges more effectively and increase your chances of achieving a successful outcome.
Understanding business value
Understanding the value of a business is crucial for a successful M&A. One of the main reasons why many M&A transactions fail is a lack of understanding or misjudgement of the business value involved.
To navigate this complex landscape, businesses need to have a comprehensive awareness of the market and industry dynamics — as well as a clear understanding of their competitive landscape. This knowledge allows them to make well-informed decisions, evaluate potential risks and rewards, and determine the feasibility of the transaction.
Conducting a thorough business valuation is a critical step in the process. By assessing the fair value of the target company, businesses can negotiate a reasonable deal and avoid overpayment. Proper valuation also helps manage expectations, ensuring that both parties have a realistic understanding of the business’s worth. By avoiding the pitfall of overpaying, companies can mitigate the risk of financial strain and significantly enhance the chances of a successful merger or acquisition.
In the realm of M&As, timing is a critical factor that can make or break a deal. A misalignment between the timing of a deal and the industry cycle can lead to adverse consequences.
For instance, entering a saturated market or making an acquisition when the industry is in decline can significantly impact the performance and potential synergies of the combined entity. A prime example is the ill-fated AOL/ Time Warner deal, where the year 2000 proved to be an unfavourable time for media firms to merge. At that time, the media industry was on the verge of a significant upheaval which took years to recover from.
Unfortunately, many managers in M&A tend to overlook long-term shifts, falling victim to the human tendency to overestimate short-term changes and underestimate long-term transformations. This failure to recognise industry cycles and predict the long-term impact of such shifts has led to the downfall of numerous transactions.
Lack of communication
Effective communication is paramount.
One of the common pitfalls leading to the failure of such endeavours is a lack of communication between the involved companies. Successful M&A transactions require open lines of communication and active collaboration to align goals, address concerns, and ensure a smooth integration process. Unfortunately, when there is a breakdown in communication, the entire process can suffer.
Additionally, the absence of management involvement can also contribute to M&A failures. Without strong leadership and active participation from both sides, key decisions may be delayed or misguided, and important issues may go unaddressed.
The success of a merger and acquisition heavily relies on clear and consistent communication, along with the active involvement of management teams from both companies. By fostering effective communication channels and involving management throughout the process, organisations can enhance their chances of a successful M&A and avoid common pitfalls that lead to failure.
Once two companies are merged, the challenge lies in seamlessly integrating their operations, processes, and cultures. A lack of cultural fit or a culture clash can create significant obstacles in achieving a harmonious working environment.
Organisations may overlook the differences in values, work styles, and practices, leading to conflicts and decreased productivity. Failure to address these cultural differences and promote a shared vision can result in employee dissatisfaction, disengagement, and ultimately, a failed merger or acquisition.
To overcome this challenge, it is crucial for companies to prioritise integration planning and develop strategies to bridge the cultural gaps. Investing time and effort into understanding each other’s cultures, aligning values, and fostering collaboration can facilitate a smoother integration process and increase the chances of a successful M&A.
No planning or strategy
The absence of a clear strategy stands as a leaking cause of failure for M&As. Without a well-defined plan and strategic clarity, the process can quickly become chaotic and disorganised. A lack of management direction and a failure to outline clear objectives and goals can lead to confusion among employees and stakeholders.
When companies engage in M&A activities without a solid strategy, they risk making hasty decisions, overlooking critical factors, and failing to capitalise on synergies. To avoid this pitfall, it is crucial for organisations to develop a comprehensive M&A strategy that aligns with their long-term goals and vision.
A good M&A strategy should outline the desired outcomes, identify potential risks, and provide a roadmap for integration and growth. It should also consider the roles and responsibilities of all parties involved, including management and stakeholders.
By having a well-thought-out plan in place, companies can navigate the complexities of the M&A process more effectively and increase the likelihood of a successful outcome.
In the world of mergers and acquisitions, skipping due diligence is a recipe for failure. It is not uncommon for companies to try to cover up their financial problems in order to appear more attractive to potential buyers. However, this short-sighted approach often leads to significant issues down the road.
By neglecting proper due diligence, companies risk acquiring businesses with undisclosed financial liabilities, operational inefficiencies, or legal complications. These hidden problems can surface after the deal is closed, causing disruptions, financial losses, and even legal disputes.
Thorough due diligence is crucial to uncovering any potential risks and ensuring that both parties have a clear understanding of the assets, liabilities, and overall health of the target company. It provides an opportunity to evaluate the true value of the business and make informed decisions.
How to avoid M&A risks
The high failure rate of mergers and acquisitions serves as a cautionary reminder of the complexity and risks involved in these transactions. From poor integration to lack of communication, and from bad timing to strategic missteps, there are numerous pitfalls that can derail even the most promising deals. That’s why it’s crucial to seek professional guidance and expertise throughout the process.
Outsourcing a business accountant can provide invaluable support in navigating the financial intricacies, conducting thorough due diligence, assessing business value, and ensuring a smooth integration. These professionals bring their expertise and experience to the table, helping businesses make informed decisions, mitigate risks, and increase the likelihood of a successful merger or acquisition. By tapping into their knowledge and skills, companies can enhance their chances of achieving their strategic objectives and maximising the value of these transactions.
If you’re considering merging with another company or acquiring a company, contact Wilkinson Accounting Solutions today to learn how our business accounting services could benefit you during the M&A process.