How to Ensure Success in Your Merger & Acquisition Efforts White Paper
How to Leverage Experience, Methodology, Playbook and Templates to Ensure Success in your M&A or Divestiture Effort
April 2020
Overview
Mergers and acquisitions take place for many strategic business reasons, but most are economic at their core. According to Investopedia, Mergers and Acquisitions (M&A) are the acts of consolidating companies or assets, with an eye towards stimulating growth, gaining competitive advantages, increasing market share, or influencing supply chains.
Why Mergers and Acquisitions Fail
According to a Forbes article, 83% of Mergers fail to boost shareholder returns. This is often due to mismanagement of risk, cultural/people differences, lack of planning, etc. Although there are many similarities in each merger and acquisition, each is unique in terms of people, geography, systems, etc. and must be crafted specifically to your situation. If not managed carefully, you risk losing critical people at the acquired & acquiring companies, including those required to help successfully execute the transition.
The following are some of the key reasons why mergers fail along with real-life examples (when applicable):
Cultural Fit / Integration Issues: Amazon’s acquisition of Whole Foods was met with a lot of fanfare, but unhappy employees, competition and market saturation could turn the acquisition into a disaster for Amazon’s bottom line according to Forbes. According to Harvard Business Review, many problems result from the two cultures not being compatible leaving Whole Foods employees in tears and causing high-turnover.
Due-Diligence and Valuation Mistakes: The Charlotte Observer calls the acquisition of Countrywide Financial “the deal that cost Bank of America $50 billion – and counting.” Bank of America overestimated the value of Countrywide’s mortgages (and underlying assets) and didn’t fully anticipate the financial crisis resulting in soured loans, write-downs, legal settlements, etc.
Poor Integration Processes: One of the most common M&A challenges (and reasons for failure) is the post-merger integration process. Mergers that do not properly evaluate and integrate key employees, processes, functional areas, critical projects/ products, and technology are a common reason for failure. According to CNET, technology and customer services integration issues impacted the Sprint/Nextel merger. Sprint acquired 15.3 Nextel subscribers based on Motorola’s iDen (Push-To-Talk) network which wasn’t compatible with Sprint’s CDMA (Code Division Multiple Access) technology. Also, Nextel’s core customers were businesses, transportation/logistics markets, and infrastructure employees and Sprint’s consumer customer service centers were not equipped to handle these calls.
Insufficient Owner Involvement: Although M&A consultants or advisors are common and valuable, owners should be involved right from the start. Owners should structure and drive the deal, letting consultants/advisors take the assistance role. Without owner involvement, the strategic vision, business objectives, and success metrics for the merger may not be fully understood.
High Recovery Costs: Often, the recovery costs of the merger are much higher than anticipated due. This may be due to other factors like regulatory (regulators impose additional conditions), integration issues, cultural issues, overestimating synergies, etc. According to the Chicago Tribune, the Daimler-Chrysler merger took 9 years, $36 billion, and was eventually dissolved for $7.4 billion due to additional complexities (multiple countries, languages, country regulators, etc.) and overestimated synergies.
Unexpected Black Swan Events and Economic Factors: Occasionally, you can do adequate due-diligence, strategy/planning, integration, etc. but the timing is wrong. For example, if the merger occurs right before the dot com crash, the 2008/2009 financial crash, or Coronavirus crisis, a merger can also fail.
Top Reasons for M&A Failures
In summary, the following are some of the top reasons (previously mentioned) why mergers and acquisitions fail.
The next section describes some of the techniques that T Exponents uses to mitigate or avoid these common reasons for M&A failure.