Challenges of Mergers and Acquisitions: Why They Fail

PE Firms
Deal Team
Due Diligence

The majority of mergers and acquisitions fail. But why is that?

This can happen for many reasons: disunity, lack of communication, impatience, poor due diligence.

In any case, many of these failures can be avoided, either by better planning, or by calling off the engagement when the two sides realize it’s not meant to be.

We’re going to look at some of the more common reasons mergers and acquisitions fail, along with some potential solutions.

Success/Failure Rate of Mergers and Acquisitions

Instead of asking, “What percentage of mergers and acquisitions are successful?” you may be better off asking “Why do acquisitions fail sometimes?”

That’s because between 70-90 percent of M&As don’t work out, according to Harvard Business Review.

If you’re about to execute a merger or acquisition, don’t be afraid to seek outside, experienced help.

The right resources will know where your blind spots are and how to overcome them.

Here are some of the common M&A pitfalls, and how to avoid them.

Vague Goals and Timelines

The acquiring must be crystal clear about what it wants to achieve and create a detailed plan to reach those objectives.

In many cases, the acquiring company may rush into a deal, perhaps because it sees an opportunity to acquire a competitor or gain market share. A lack of strategic thinking, however, can lead to poorly executed transactions that fail to deliver expected results.

Companies should instead take the time to develop a clear strategy. It should not only outline the company’s goals and objectives, but also specific dates by which they want to achieve them.

SMART goals are a good starting point, and may help avoid wasting time and resources on poor execution.

READ MORE: Merger Planning & Integration: Best Practices for Private Equity Firms

Overpaying for a Merger or Acquisition

Companies may become too focused on the potential benefits of the acquisition, leading them to overlook the true value.

They may also overestimate the potential benefits, and fall in love with ideas that will never become reality.

One example of this is when AOL and Time Warner infamously merged Jan. 10, 2000, in a $350 billion deal. Ten years later, the companies’ combined value was around 14 percent of what they were worth when the merger was announced.

There are many reasons why this marriage failed, but one thing is clear: the price tag was far too high.

Poor Communication

This can be a major contributor to failed mergers and acquisitions because it often leads to confusion. Employees are often collateral damage to this crucial mistake.

If they don’t understand how the merger or integration will affect their job, they may start to develop anxiety and mistrust. This could snowball into a lack of engagement and motivation, leading to lower productivity and higher turnover.

Lack of communication may also mean companies don’t fully understand each other’s processes or objectives ahead of time.

Instead, they should develop clear communication strategies. This can by done via proactive updates and welcoming feedback from those who may not be directly involved in making decisions.

Unrealistic Expectations

Some companies expect acquisitions to deliver immediate benefits without fully understanding the time and resources required. This is a surefire way to put key stakeholders on edge, leading to disappointment and frustration.

The better expectations are managed from the beginning, the more time leadership will allow for everything to fall into place.

If you get everyone’s buy-in ahead of time, when the pressure does begin to mount, you can remind them about the original plan to which they agreed.

READ MORE: Post-Merger Integration: Framework, Keys to Success

Misunderstanding the Company

Some key factors to understand about the target company pre-acquisition are its business model, market position or customer base.

This may be particularly difficult if the companies being joined have a lot in common. Perhaps their customer base is similar, but they have a completely different approach to acquiring new clients or sales.

It can sometimes be easier to join two companies that have little overlap. One example of this would be when Amazon bought Whole Foods for $13.7 billion in 2017.

“Millions of people love Whole Foods Market because they offer the best natural and organic foods, and they make it fun to eat healthy,” said Jeff Bezos, Amazon founder and CEO, at the time.

Amazon was not a leader in offering “natural and organic foods” before the acquisition, meaning they could rely on Whole Foods’ expertise in that area without the challenges of merging with an existing process.

Poor Due Diligence

If the acquiring company fails to conduct adequate due diligence on its target, they may overlook key risks or fail to identify potential synergies.

This is a smart time to bring in an experienced outside resource.

The BluWave-grade service providers in our network have helped PE firms hundreds of times in these exact situations. They leave no stone unturned so that both parties can move forward with confidence and begin their journey together without any surprises.

READ MORE: What is Commercial Due Diligence?

Cultural Differences

When two companies have different cultures, values and management styles, it opens the door to conflict and perhaps lack of cooperation.

To address this, companies need to be proactive in addressing cultural differences and develop a plan for integrating the two cultures. This may involve cross-cultural training, mentoring programs or the development of a shared set of values and goals.

An interim CHRO can be a invaluable resource in these situations.

READ MORE: Private Equity Interim CHRO: What Are the Benefits?

Operational Differences

Similar to cultural differences, operational differences can also pose a challenge in mergers and acquisitions.

The two companies may have different systems, processes or procedures, which can lead to inefficiencies or a lack of coordination.

The solution is to identify the key operational differences between the two companies and develop an integration plan. This may involve the adoption of new technologies or systems, or the development of new procedures or workflows.

Consider hiring a strong IT due diligence resource in these situations.

Regulatory Issues

The two companies may be subject to different regulations or legal requirements, which can complicate the integration process.

Carefully review each company’s regulatory environment to identify any potential obstacles or challenges.

Involve legal experts in the due diligence and integration process to ensure full compliance.

READ MORE: Healthcare Compliance: Due Diligence Checklist

Mergers and acquisitions are complex transactions that require careful planning, due diligence and effective integration.

While there are many reasons why mergers and acquisitions fail, many of them can be avoided.

By proactively addressing the key challenges, companies can increase the chances of success in their new business relationship.

Fortunately, we have hundreds of expertly vetted service providers who know how to confront each and every one of these challenges, regardless of your industry.

If you’re considering merging with or acquiring another company, set up a scoping call with our research and operations team to see how we can help things go as smoothly as possible.


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