Mergers and acquisitions are major opportunities for both the seller and the buyer. They can produce tremendous growth, give access to new resources to both parties, and of course, provide each leadership team with knowledge that the other team possesses.
However, not every M&A attempt results in a happy ending. Quite a few of them fail. Understanding why mergers and acquisitions fail is crucial, as these failures can be costly, time-consuming, and frustrating for everyone involved. So, you want to avoid a failed M&A attempt at all costs unless the deal simply is not going to work in the long run.
If you look at some previously failed M&A deals, you’ll see that some of your favorite companies that are now closed or dying ended up that way, specifically because of bad M&A deals going south and costing them everything.
To help you with that, the team at Final Ascent is here to provide you with a list of the most common problems that cause M&A failures. We’re M&A advisors who have helped a multitude of companies navigate this complex process and avoid failures, and we know what it takes to get a good deal to go through and stay fruitful in the long term.
Let’s get started.
1: Poor Valuations
Whenever an M&A deal is even brought up as a serious proposition, it’s important that the company being absorbed or purchased performs a valuation. That’s when a business adds up all its profits, liabilities, value-changers such as likely future earnings and non-financial assets, and more to come up with an accurate value for its business.
That valuation has to be accurate. Obviously, everyone tends to think their belongings are worth more than they truly are, and the company that is being paid to come into the other company is going to want to get the most for it that it can.
Even if it’s not via intentional dishonesty, it’s very easy for assets and numbers listed in a valuation to look better than they really are.
If you’re on the end of the deal that’s paying, that can end up being catastrophic. You can acquire an entire business for millions of dollars just for it to fall through and cost you more in the long run than the acquisition did.
It is the responsibility of both parties to not only ensure that all valuations are accurate but to also determine whether or not the merger or acquisition will be fruitful for both parties when it’s finalized.
You don’t want to put all that effort and money into a merger or acquisition just to find out that you can’t do anything with the assets you paid top dollar for because of a factor you didn’t consider.
The best way to do this is to ensure that you’re double-checking valuations, getting professional help in checking the validity of valuations, and of course, consult a consultant such as Final Ascent to get a second opinion on how fruitful the attempt will be in the long term.
2: Cultural Misalignment in Integration
Sometimes, a failure has nothing to do with finances or decisions that go into the on-paper agreement. Sometimes, mergers and acquisitions fail because the two companies are so different that they simply can’t integrate successfully.
For example, imagine you’re operating a business that is very relaxed in nature. There are management members and a clear chain of command, but everyone’s on very good terms, and everyone has a voice that is practically equal.
You’re relaxed about offering time off and accommodating your employees, and while you’re extremely productive, you put the atmosphere of the workplace before that big order you have to get completed in a month.
In comparison, the company you just merged with is a traditional company that has a very strict chain of command, does everything by the book, and is focused on productivity before anything else.
What do you think happens when you try to combine workforces and your employees have to deal with an entirely new type of business approach? How do you get those dramatically different business models to function codependently?
The short answer is – you don’t. It doesn’t work.
Unfortunately, company culture isn’t usually at the top of anyone’s list when it’s time to hit the negotiation room. Everyone is fixated on the numbers and the hard data, and culture tends to be an afterthought.
To prevent completely failing the M&A attempt a few months in, it’s important to figure all that out before any paperwork is signed.
Talk to the other party about their company culture and see where the two of you align and misalign. Think about how the misalignments can impact your integration and how serious that impact can be.
Don’t be afraid to pay a visit to the other company. In fact, you should be excited too. You wouldn’t get married without ever meeting the person you were getting married to.
So, why jump into an M&A deal without getting to know how the other business really operates from an inside perspective?
This is something you’re going to have to put effort into and set time aside for. There’s no quick way around it, and the more you know, the better your chances of success will be.
If at any point you feel that the other company’s culture isn’t something that will mesh well with your own, start considering what the consequences of continuing can be, and if it’s risky, it might be a better idea to stop the deal.
3: Inability to Integrate Properly
Integrating one business into another involves more than just reallocating a few staff members and tweaking ongoing projects. In fact, the complexity of this process is often a pivotal factor in why post-finalization mergers and acquisitions stumble. It’s especially crucial when considering decisions to sell your company.
Integration requires you to consider every last detail. In some cases, the two businesses don’t really change much, and the merger or acquisition functions a lot like a partnership, but that’s not the rule. That’s the exception.
There are many instances where parties will attempt to integrate, but one team’s specialists aren’t prepared for the transition and can’t perform, the other party has projects they’re obligated to finish, but the integration process throws the projects off, and even something as simple as figuring out which staff members from either company will stay and which ones will go can cause major conflicts.
Every little conflict can potentially create major problems for the M&A attempt because their effects tend to snowball.
Take employee assignments, for example. It’s more complicated than simply putting employees in the wrong positions, and they don’t perform at their best. The projects those employees are working on start to fall apart, and all the other projects that rely on those projects cascade into failure as well.
These are very common issues, and the only way to avoid them is to take two major steps.
First, take the time before finalizing a deal to discuss how integration will be handled. Nothing is final yet, and if there are issues that can’t be worked out in a practical manner, it’s perfectly fine to walk away.
Not only that, but practically everything in the business world is a lot easier when you have a plan. M&A integration is no different. A plan will keep you on track, you can relay the plan to employees ahead of time to ensure they’re prepared, and the whole thing will go over a lot more smoothly.
Then, it’s important to understand that it’s going to be a difficult process and ensure that you and the other party are in the right mindset to work through those issues effectively. If you’re butting heads with the other party, or vice versa, on every little issue, then it’s not going to work. Cooperation is crucial to prevent failure.
4: Overestimating Your Capacity for Growth
This is another significant factor in why mergers and acquisitions fail. Sometimes, we’re so enthralled by the prospect of growth that we overlook its limits.
Think of it like your home’s internet. You pay for what you consider to be plenty of bandwidth, and at first, it works great.
You’re not using a fraction of it. Then, you buy two new computers that run on it 24/7. Then, each family member gets a smartphone that’s connected to it. Everything is still running fine, but you’re using more of it, and you’re getting your money’s worth.
Then, everyone gets a tablet, you buy several smart appliances, set up an Alexa system around your entire home, and start operating a YouTube video studio from your shed that has several devices connected to your internet. Now, every device runs slowly. No one can load a webpage fast enough for it to be useful, and the whole thing is a mess.
This is the same concept.
Depending on how your business is set up, there is a limit to how much growth can be experienced before it’s simply too much. After that point, growth becomes a negative aspect of your company, and you can’t handle anything effectively.
An M&A attempt is usually based on generating tremendous growth. So, if one or both parties can’t handle that explosive growth, the deal can fall apart, and both companies can be damaged beyond repair.
This isn’t necessarily a deal breaker, though. There isn’t actually a cap on how much growth is possible. It depends on your company’s capacity for growth. If you need to expand a bit or move things around to increase your capacity for growth, you can do that before you finalize a deal to prevent this problem.
However, that requires you to recognize your limitations and be honest about them. Take time to consider how much growth you can handle (and how much your soon-to-be partner can handle) and determine how much growth is likely to stem from the deal. If those two things don’t add up, look into what can be done to resolve the issue ahead of time.
Even if you can’t fix it in a practical manner, the worst thing that happens is you have to cancel the deal. If you don’t do this before the deal is finalized, you’re going to find yourself in a lot of financial trouble sooner rather than later.
5: Underestimating Costs
There are two costs that also tend to cause problems with M&A.
First, there’s the cost of integration. As we’ve said multiple times, integration is probably the most difficult part of an M&A deal. It also costs tons of money if you want to do it properly.
Underestimating those costs and how long it will take to recoup your losses can be catastrophic for the deal and both parties involved.
The second cost to consider is the cost of the deal itself.
There have been several cases where a business has dramatically overpaid for an acquisition. It happens because the buyer didn’t do their due diligence, wanted to throw out extra money to keep the competition from getting an opportunity to buy, and even from being pressured in the negotiation room. In any case, this is a bad move.
At best, overpaying means it takes longer to recoup losses. At worst, overpaying leaves you with a dud of an M&A deal, and you never recover.
To prevent this, start by doing your due diligence and swaying toward the safe side of things. Always expect an expected cost range to end up at the higher end of your projected range. If it doesn’t cost that much, you save some money. If it does, you’re prepared.
Also, make sure you’re getting professional valuation help to get the most accurate valuation possible.
Get Help from Final Ascent
M&A deals fail all the time, and understanding why mergers and acquisitions fail is crucial – that’s why you need professional M&A advisors. Sometimes, you can cut your losses and recuperate. However, if you look at companies like Chrysler, Sears, or Kmart, you’ll get a very clear picture of just how bad it can be when these deals go wrong.
You need a professional consultant to help guide you through this process step-by-step, and Final Ascent is here just for that. Contact us today.