Six Reasons Mergers and Acquisitions Fail

Firstly, What Actually is "M&A"?

In 2018, there were over 1,900 mergers and acquisitions (M&As) reported in Australia, with a value of approximately $185 billion (US$146billion). M&A is a general term that is used to describe the consolidation of companies or assets. There are various ways this can happen including a merger, acquisition, consolidation, tendering, purchase of assets and so on. The topic of what exactly is M&A could be a whole article in itself, but for a full rundown you can check out this post here.

What Constitutes a “Failure”?

If you browse around online, you’ll find articles claiming that anywhere from 50% to 90% of M&A deals “FAIL” or are “unsuccessful.” Not including the ones that don’t settle or complete!!

"Failure" Can Come Down To:

The buyer incurs a massive write-down after the fact, as it acknowledges the seller wasn’t as valuable as it first thought.
There’s a mass exodus of employees from the seller, and the founder/s and management team all leave (eroding value to the buyer).
The buyer has to divest afterwards, as it realises the deal wasn’t quite what they thought it was, which can happen for many reasons.
The buyer ends up having financial issues for one reason or another and becomes insolvent.

Failure Though Shouldn’t Come as a Surprise

When any two parties come together, success equals hard work and commitment and will inevitably have its ups and downs. Just like you can’t know everything about a person before you marry them, the same applies to acquiring a company.

Six Reasons Mergers and Acquisitions Fail:

Cultural Mismatch
The company’s cultures are entirely different. Bringing people together from different styles of operating is HARD!! And culture is often something that is indefinable with the differences not becoming apparent until after the deal is done.
From Partnership to Acquisition
Your company just launched a successful joint venture or partnership with another, much smaller company. Then you think – let’s buy them to lock it in!! But just like anything in life-changing the dynamics of a relationship often has the impact of changing the whole foundation on which it’s based. A successful partnership or JV might not work so well as an M&A deal.
What You Didn’t Know
While doing due diligence is designed to find out as much as possible about the seller BEFORE the deal takes place - you’ll never find out everything. Sometimes we make a good decision, but the outcome of the decision may not be 100% related to the process we have gone through to make that decision. To find out more about this read poker champion, Annie Duke’s book ‘Thinking In Bets’.
Financial Failings
Plans are often based on expected financial results, which are taken from the past, but the past is not a predictor of future success. What is anticipated may or may not come to fruition. This can lead to tension between the buyer and seller, and result in frustrations and in-fighting. Unfortunately, not everything can be reduced to an excel spreadsheet and while all the diligence in the world might be taken, no one can predict the future.
Your Reasons Weren’t Logical
We are all guilty of making decisions that we later reflect on and re-evaluate that we potentially shouldn’t have done what we did, which means that just because you can do something, doesn’t always mean you should. Emotion (and ego) can sometimes get in the way of logic.
The Risks Aren’t Fully Understood
Let’s say someone suggests you take a course of action that is irreversible - such as donating a kidney. It would be a well-considered decision and one that wouldn’t be made lightly. But if the decision is not so significant, such as donating blood, well you might decide to do that with less thought. Sometimes people treat M&A like donating blood – “I can always change my mind if I want, and a little loss of blood is nothing”. This is a fundamental error of judgment – M&A is a significant event and often results in much more than a little blood loss. The Wesfarmers Ltd / Coles Group relationship, for example, has come full circle. Wesfarmers acquired Coles in 2007 for $21b. It recently de-merged from the Coles Group and both are back where they started – so to speak.

Should I Proceed With a Merger & Acquisition?

I’m certainly not saying you should never pursue this course of action. Just that these types of deals should always be done with significant due diligence to make sure the deal works for both parties. Remember - some deals DO work out. Getting third-party advice during this process is crucial to ensuring the best chances of success. The time and effort to engage an expert opinion will be worth it in the long term if the deal comes off successfully or if the deal doesn’t go ahead because of what you discover– think of the money and pain you’ll have saved.

What Next?

If you or your business are looking at changing any aspect of your business structure or operations, including merging or acquiring, the team at You Legal can provide a complimentary assessment of your legal needs. Get in touch with the team today.