Avoid the Common Causes of Mergers and Acquisition Failure

Mergers and acquisitions (M&A) are growing as a result of business restructuring, reorganization, and globalization. It has been a popular approach for businesses looking to develop and strengthen their market position while also improving their overall health and bottom line. Although the number of M&A activities varies each year, growing through this approach has been an attractive strategy for large and small firms.

M&A, on the other hand, might look appealing and strategically logical, but it is not always successful. We’ve all seen or heard about high-profile merger and acquisition failures. AOL–Time Warner, NY Central–Pennsylvania Railroad, Sprint-Nextel Communications, and Quaker-Snapple are just a few examples. M&A is a time-consuming and complex process. It’s going to be a risky venture no matter how extensive the planning and research were done before the process. There’s a lot that can go wrong in the course of negotiating a deal, and some issues may not be clear until all has been said and done.

Given the high risk of M&A transaction failure, this article will discuss the common reasons why many M&A transactions fail. By looking at some of the most common causes of these failures, business owners will be able to take preventive measures to increase their chances of M&A success.

 

Mergers and acquisitions fail for a variety of reasons:

  1. Overpaying

A firm overpaying for its acquisition is a common culprit for an M&A to fail. The majority of attractive target firms operate under the premise that everything is for sale at the right price. This practically means that the firm is always for sale if a buyer is prepared to overpay.

Many purchasers also believe that they must overpay to prevent rival bidding or to protect their chance of acquiring the target firm. However, paying too much can ruin any prospect of achieving a reasonable return on investment. There is a significant risk that the outcome may devastate shareholder value if this occurs. This stymies the M&A from the beginning, perhaps leading to greater instability or the failure of the deal.

Buyers should set a limit before starting negotiations and stick to it to prevent the risk of overpaying.

  1. Inadequate strategic planning

The major focus of many M&A transactions is on closing the acquisition, but not enough attention is spent on planning the strategy. Because of this lack of strategic preparation, even minor obstacles are significantly more likely to stymie the deal’s actual potential.

Deal failure can be avoided with meticulous planning and the development and implementation of a cohesive strategy. It means that an M&A activity needs a logical strategy to drive it to success. If the transaction lacks a fundamentally sound reason to continue, this can inevitably mean failure.

  1. Lack of cultural fit

This problem brings us to the question of “Is there a good cultural fit?” Failure can sometimes be caused by a simple cultural mismatch. Inability to understand cultural differences and failure to fit culture can produce animosity among teams or impede the efficacy of the deal.

Both parties must be able or willing to recognize the other and seek the best ways to bridge the gap. Underestimating this part of mergers and acquisitions as a “soft area” of the transaction might result in a failed M&A activity.

  1. Wrong time in the industry cycle

The timing should be perfect or as the classic saying goes, “Timing is everything.” Every deal has its own life and momentum. Understanding the ebb and flow of deal momentum is critical to deal success. Executives should ensure that they do not pursue the M&A strategy at the incorrect period in the industry cycle, hence avoiding the transaction from failing. 

  1. External factors

Let’s say, for example, that everything is perfect already. All are planned and carried out as intended. As soon as the deal closes, a pandemic sweeps the world. It then causes fundamental changes in customer behavior, supply networks, and routes to market, throwing enterprises off balance and leading businesses to fail.

This refers to things over which management has no control. Unpredictably unexpected things. Many transactions have failed because of extrinsic variables that few could have predicted. For example, even the best-laid plans can go awry if the economy undergoes abrupt, significant shifts that influence stock prices and interest rates. A negative economic climate will surely impede the performance of mergers and acquisitions, no matter how well they were supposed to perform.

  1. Lack of management involvement

Many CEOs devote all of their time to running the firm, while hired professionals undertake the majority of the M&A transaction. No aspect of the M&A process, from finding a suitable target business to integrating the two organizations into the newly created entity, will handle itself. Leaders should schedule time for them to be involved in the M&A transaction.

  1. Insufficient due diligence

The importance of due diligence cannot be overstated, partly because so many businesses appear to be eager to get it over with as soon as possible.

Due diligence is vital in mergers and acquisitions, and it necessitates a high level of legal clarity and investigative zeal.

Correct due diligence can guarantee that a buyer understands what they are purchasing, including any potential hazards. Buyers who do not conduct proper due diligence are effectively purchasing blind, placing themselves at risk of making unwise decisions unintentionally.

 

Bottom Line

The number of failed transactions each year, even among experienced practitioners, demonstrates the difficulties of getting everything exactly right in M&A. Inability to maintain focus on the intended objectives, failure to develop a solid strategy with appropriate control, and failure to implement adequate integration procedures can all lead to the failure of any M&A transaction. A list like the one we just discussed serves as a caution to managers that things can go wrong even after they appear to have taken all the necessary precautions, and therefore they should be vigilant about the possible pitfalls that could occur.

However, this article is not intended to dissuade you from selling your firm, but rather to offer a realistic picture of mergers and acquisitions as time-consuming, labor-intensive, and complex transactions. As an executive, you must evaluate several viewpoints and processes to prepare for your journey to successful mergers and acquisitions.

 

Ready to explore your exit and growth strategy?

If you are a business owner intending to retire and need a succession plan, or if your firm wants to develop, grow, and enter new markets, mergers and acquisitions are the best strategies for you. It can be an excellent exit plan and a solid strategy to improve the firm’s overall health, productivity, and bottom line. However, you can only reap the complete value of M&A if you find the right buyer for your firm.

If you decide to sell your firm or merge with another, HWA Alliance of CPA Firms, Inc. (HWAA) offers business owners convenient, creative, and value-maximizing solutions for developing and exiting their firms. Allow HWAA to be the ideal buyer for your firm so that we can help you translate your M&A strategy into a huge success. We have decades of M&A expertise, working with different offices and organizations, and have helped hundreds of business owners achieve their personal goals while also assuring the future growth of their firms through M&A strategy. We will make sure you don’t devastate all the many hours and money you’ve invested in growing your business by strategically positioning your firm to continue doing business under the umbrella of HWA Alliance. Our successful M&A transactions help our partners and target enterprises expand into new markets, add complementary goods and services, gain access to new technologies, and, most importantly, protect their legacy through overall growth and success.


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