Mergers and acquisitions (M&A) deals offer many benefits, including more diversified business portfolios, increased business capacity, a larger market share, and access to new expertise and talent. Still, just as partners sometimes dissolve business partnerships, buying or combining one company with another only sometimes works out. In fact, the rate of M&A failures is between 70% and 90%; nevertheless, companies spend $2 trillion annually on M&As.
Common causes for failures
Anyone in business can tick off at least a few high-profile failures like AOL-Time Warner or Kmart and Sears. The reasons these deals and others fail vary on a case-by-case basis, but there are some recurring issues to watch for and guard against:
- Destruction of the brand: The purchasing company may have good intentions but may not understand the target company – what makes it successful and popular in its market and its products. The buyer or new partner may, in the eyes of the customer, taint the brand.
- Overly Idealistic expectations: Optimism is good, but looking at a single deal as the way to the promised land can be a mistake. Closing the M&A deal without working out a realistic and actionable plan is a fool’s errand.
- Poor integration: The unrealistic expectations can further be complicated if the companies are incompatible and poorly integrated. Problem areas include lack of communication, different job descriptions for the same roles, production disruptions, culture clashes, and pay discrepancies between the companies’ employees.
- Overpaying: Business decisions sometimes get influenced by clouded judgment. A CEO or owner loses perspective as they rush to close the deal, or the target company may overestimate its value. The overpayment can soon put the merged organization in trouble because it spent too much money closing the deal.
Look for the red flags
M&A deals can be extremely complicated, even with small or mid-sized companies, so looking for these common issues and other red flags is crucial. Working with an attorney who handles M&A can help identify and address problem areas and draft agreements that reflect this. They can also provide impartial insights that enable the client to move forward confidently.