M&A Deals - Failed Acquisitions
Why Do Some M&A Deals Result in Failure?
After the closing of an M&A deal, it is up to the buyer to ensure the success of the transaction. However, it’s only fair to say that not all of the work comes post-closing! In fact, the most successful buyers expend a lot of time and effort before the closing.
There are several reasons why acquisitions fail, but this generally occurs for two primary reasons. The first is that the buyer was overly optimistic about the potential synergies of a transaction. Thorough due diligence and analysis, before closing, is imperative to avoid these types of failures. Second, and this happens more than we’d like to see, the buyer is not able to competently manage the newly acquired business or underestimates the amount of time the transition will take.
When the buyer is overly optimistic about possible synergies with the target company and possible economies of scale, it can lead to a failure. Similarly, if the newly acquired company’s products or services do not grow as anticipated, there’s a chance for failure. Furthermore, if the buyer has underestimated the strength of the market competition, the amount of capital needed to grow the business, or other associated costs related to the transition of ownership or overestimated potential cost savings, it will be very difficult to ensure the success of the newly acquired company.
If the buyer is unable to properly manage the business it will almost certainly lead to a failed acquisition. The management team needs to have a strong understanding of the business being acquired. Furthermore, the acquiring company needs to make sure that it retains key management and other employees to ensure the operations run as planned. If the corporate cultures of the acquiring and acquired companies are vastly different, it can lead to poor chemistry between the employees of the two companies, which can cause tension in the workplace. This tension deteriorates the team effort and can cause financial losses.
In order to complete a successful acquisition, thorough due diligence is an absolute must. Such diligence must include a complete assessment of the buyer’s own strengths and weaknesses and a detailed analysis of the expected financial results. While there are too many conflicts of interest to have your investment banker complete the due diligence, the bankers are certainly well equipped, or should be equipped to help guide the process. A well experienced investment banker certainly knows about the potential pitfalls related to doing an acquisition and can help the buyer avoid them. When the proper diligence and analysis is done, the result is a successful acquisition.
M&A deals can be exhilarating for both the buyer and the seller, if done properly.
