Reasons Most M&A Deals Negatively Affect Shareholder Value: Complete List


M&A is generally seen as an amazing opportunity to grow your business, get a major competitor out of the way, exit the business world and make a great payday, or merge with a company to essentially join forces for mutual benefits.

Unfortunately, there’s one thing that tends to be consistent across most M&A deals. Shareholders tend to start backing out or becoming hesitant to invest. 

That can be a scary prospect. Especially since your shareholder value has a lot to do with how the M&A deal is executed and how desirable your company is to make a deal with. A major drop can negatively impact your company dramatically, as well. 

Knowing the main reason most M&A negatively affect shareholder value is crucial if you want to minimize its impact. So, we’ve developed this list of the most common reasons why most M&A negatively affect shareholder value. 

What is the Main Reason That Most Mergers and Acquisitions Negatively Affect Shareholder Value?

One of the main reasons that shareholder value is negatively impacted is because of the long history of data showing that M&A fails to generate value in more cases than it helps. 

Imagine you’re a shareholder investing in a company’s success. You’re not doing it out of the kindness of your heart. You want to have a huge ROI. So far, the company you hold shares in is doing great. It’s constantly growing, you’re making more money than you expected, and there’s no sign of it stopping. 

Then, the owner of that company decides it wants to merge with some random company that doesn’t make any sense. You don’t see how it’s going to work. Would you want to keep your shares or start selling your business’s shares before the inevitable failure of the deal and loss of your ROI?

That’s how a shareholder has to think. The decisions you make affect their ability to make money

There are several reasons that this occurs, and shareholders know what to look for. We’ll list each one out with a description and examples. 

1: Inappropriate Reasons for Merger

Operating a business, especially one worth millions of dollars or more, is a scary operation. When you’re dealing with that much money, even the smallest mistakes can be catastrophic. As such, a lot of M&A deals are initiated out of fear.

Reason that most mergers and acquisitions negatively affect shareholder value - fear

If a trend that was keeping the company alive suddenly starts to fade, a business owner might think the business is in trouble and try to merge to avoid that. Many other reasons can cause that type of decision-making, too.

Greed is another driving factor that is inappropriate. As we said earlier, if a company is doing great and constantly growing, it can be a red flag for shareholders if it randomly decides to acquire more businesses.

Just to make more money, a greedy business owner can start making reckless high-risk decisions. Shareholders aren’t going to stick around when that type of behavior is driving the company forward. 

Let’s look at an example of why this is a problem for shareholders. 

You operate an urban apparel company. Your inventory was selling extremely well for 5 years, but now, current fashion trends are leaving you with fewer and fewer customers. Instead of reevaluating your inventory, marketing, and other aspects of your business, you initiate an M&A deal with a low-end clothing company. 

The deal doesn’t make sense, because you have two different target audiences, you’re selling entirely different products, and it just shows that you’re not confident in the future of the business. 

2: Lack of Focus

Mergers and acquisitions aren’t easy. The process of setting the deal up is difficult and takes time, and even when it’s completed, there’s a lengthy process in-store when you start rearranging the two businesses to operate in tandem

Unfortunately, most business owners don’t handle that very well. They’ll typically become very involved with the M&A, and they’ll neglect the responsibilities they have to the business itself, instead of delegating the right responsibilities to an M&A expert.

Reason that most mergers and acquisitions negatively affect shareholder value - lack of focus

No company performs well when its owner gets caught up in a bunch of other things. Productivity slows, mistakes are made, and in general, things start falling apart. 

For example, let’s say you have all the best motives and intentions for initiating an M&A deal for your shoe company, and it’s a deal that can be very fruitful. However, you only have so much time and energy to devote to your work life, and very early on, you start focusing all of that attention on organizing sales history, negotiating contracts, and eventually, rearranging employees and resources for what used to be two companies.

You’re no longer getting on top of logistics problems, communicating with management, or any of the things you once did regularly. Your business can’t hold itself up. 

This affects the shareholder value in two ways. 

First, if shareholders anticipate this, they might just pull out as soon as possible. However, even if that doesn’t happen, your business will lose value as it slowly declines in productivity and daily operations. 

It’s crucial to ensure that you maintain your responsibilities as a business owner while dealing with the M&A, as well. It’s difficult but neglecting your business to focus on the deal can affect the deal and your shareholders, and if it occurs during the post-M&A phase, it can ruin the business going forward. 

3: Overvaluation Mistakes and Potential for Corruption

When you’re dealing with such large amounts of money, even small financial mistakes are devastating

For example, imagine having $100 in $20 bills in your wallet. You accidentally drop 1/5 of your money while cashing out at a store, and you don’t realize it until you’re gone. You’ve lost $20. You’re probably not happy about it, but it’s not the end of the world. Now, imagine the same scenario, but you have a total of 10 million dollars and drop 1/5 of it. Now, you’ve lost 2 million dollars.

That’s essentially what happens when you overvalue a company and pay way too much. You lose a ton of capital, and the business isn’t even worth it. On top of that, your other projections are off and you don’t see the return you expected, because you got the main factor of the deal wrong. 

This happens all the time.

However, there are also far more sinister concerns when it comes to spending too much.

Corruption at the CEO level is not uncommon. 

In 2013, the heavy equipment company Caterpillar was wrongfully charged 580 million dollars during a botched acquisition of a Chinese competitor. 

There’s no reason to assume every company you try to do business with is going to try something unethical, but it is a possibility, and it affects shareholders dramatically. 

Whether you end up spending too much due to corruption on the other party’s behalf, or because you simply overvalued the other company and it’s your fault, this is a common issue that drains your company’s capital and makes a major decline in value likely.  

4: Third-Party Issues

While you’d think that M&A was a process solely between the two entities doing business, the truth is, that a lot of third parties can suddenly ruin an otherwise amazing deal

Even when you fully agree with the terms the other entity wants, and they agree with you, someone else can come in and make the process difficult for a variety of reasons. 

This is almost always a government entity, and there is a great example of this that occurred in 2013.

Reason that most mergers and acquisitions negatively affect shareholder value - government

If you’ve seen Anheuser-Busch and Modelo products in the adult beverage section, you know they get a lot of shelf room, and they’re two of the most popular beers. Well, they were attempting to join forces in 2013 to dominate the brewing industry.

However, the United States government decided that, if the deal were to go through, Modelo would have to open breweries in the United States. This was an attempt to generate American jobs because Modelo had most of its breweries in other countries. 

That deal would have devastated Modelo’s bottom line with increased operational costs. 

Modelo still took a massive financial hit, and the deal was instead changed to only let Anheuser-Busch acquire Modelo’s international holdings group. In the US, the two are not connected. 

This can happen for a number of reasons. Governments can use bureaucratic measures to try to benefit from the deal in ways that harm it, they can stop deals because of monopoly laws, and even unions can force the government to intervene if they think a merger will go against their contracts. 

Obviously, if that happens, all the time and energy used to facilitate the deal is lost, and that can negatively impact both businesses going forward. In turn, shareholder value drops as a response

5: Cultural Differences Impact Future Productivity

This is an unexpected challenge for most business owners, but did you know even your company culture can negatively impact your shareholder value during and after M&A? Well, it can, and it often does.

Reason that most mergers and acquisitions negatively affect shareholder value - cultural differences

The most notable occurrence of this is during the Daimler-Chrysler M&A of 1998

That should have been a dream deal that made both companies more money than any middle-market company could imagine, but unfortunately, it ended in catastrophe. 

See, most business owners handle M&A by looking at the numbers and wondering who is going to be in charge. Especially if one party is leaving the business in the process. Very few stop to think about how each business operates individually, what employees expect, and how those things will work when they’re combined. 

Well, with the Daimler-Chrysler M&A, one company had a very relaxed work environment with little hierarchy, and the other was a very traditional business that valued hierarchy a lot. When they combined, everything fell apart, and it was one of the costliest failed M&A attempts in history. 

This is one of the problems with M&A that can be easily avoided, though. It simply requires both parties to consider the human element behind both businesses and then compare the workplace culture of each business against each other. The biggest problems are usually very apparent like they were in the Daimler-Chrysler situation, and all you have to do is pay attention

Similar issues have occurred with AOL and Time Warner, as well. If you look at both companies involved in either of these notorious failures, you’ll notice that one typically isn’t around or is nowhere near as powerful as they were before the merger. 

Is M&A Worth it?

We have just spent a considerable amount of time telling you all about what is the main reason that most mergers and acquisitions negatively affect shareholder value and potentially destroy your company in some cases. The deal doesn’t even have to be finalized, either. 

So, is it even worth it to pursue M&A? 


All M&A advisors will tell you M&A does come with a lot of risks. Even beyond what we’ve talked about here, there are business risks that are inherent to the process, no deal is ever 100% guaranteed, and there is usually a lot on the line.

However, when it goes as planned, it is often a huge opportunity for growth. In fact, it’s the primary way that companies grow to the extreme levels they do in the modern business world.

The key is to make sure that you’re checking off a few boxes when you handle an M&A attempt. Are you initiating it for the right reasons?

Have you built a relationship with the other entity and verified they’re trustworthy?

Have you done your own due diligence to ensure that you’re not making any costly mistakes?

Have you talked to your shareholders to see how they feel about the decision?

All of those and more are questions you need to ask yourself.

Now, we understand that it sounds a lot easier than it is. It’s true that handling all that is a complicated process. 

That’s why you need help. 

If you’re considering M&A, contact Final Ascent. We specialize in helping business owners navigate the complicated world of M&A to achieve real results while bypassing the complications that cost so many other companies millions of dollars.
Contact us today.