Mergers and acquisitions (M&A) can often be a time-consuming and challenging process that can leave those involved feeling frustrated with the lack of progress in any potential merger or purchase of a business.
Indeed, a recent Harvard Business Review report found that the failure rate for M&A sits between 70 per cent and 90 per cent. So, why are mergers and acquisitions so tough to complete?
Overpayment
One of the biggest reasons for M&A failure is a misunderstanding of the market of the business that is being acquired.
When this happens, organisations tend to overpay, devaluing the actual worth of the business at the centre of the M&A.
Sellers will also overvalue their business to get the biggest premium possible, and of course, will not warn potential buyers that the sale price is too much.
Overestimating synergies
Synergy is the additional value created by a transaction, meaning that the newly merged business will hold greater value than it did previously, and that cost savings will increase.
Many businesses will overestimate synergies, believing the value and cost savings of M&A to be far greater than they actually are.
Poor integration process
Once a merger and acquisition have been completed, a post-merger integration must be successful, but this is more challenging than anticipated for many organisations.
Key employees can be overlooked, and crucial projects and products can be shelved or abandoned.
Other important processes that were vital to the output of the previous business can also be mishandled, leading to an ineffective, low-quality product or service.
Capacity to expand
Many businesses involved in M&A do not give sufficient foresight into their own capacity to handle such a process. This can lead to poor integration and becoming overstretched, leading to the failure of the deal.
Often businesses are vastly unprepared in terms of planning for the time, effort, and money that is needed for the M&A.
External factors
External factors, sometimes referred to as exogenous risks, are everything negative that could impact the M&A that is outside of the organisation’s control.
These risks include a shift in market trends that make the current business model incapable of surviving, or global events such as a pandemic that could affect an organisation’s ability to continue trading.
Inadequate due diligence
Due diligence is required in any M&A, ensuring the validity and legitimacy of the business being acquired, not to mention its current financial health.
With M&A already a time-consuming process, it is tempting to try and cut corners with due diligence, which will ultimately lead to problems down the line.
Concerned about an upcoming merger or acquisition, or want more advice on how to successfully complete a deal? Contact us today.
