Mergers and acquisitions, despite their attractiveness as a tool to increase business value, have many risks. In this article, we will analyze the common reasons that lead to the failure of a transaction.
The current dynamic of M&A deals in the market
The successful implementation of mergers and acquisitions (M&A) in today’s business environment is becoming one of the key aspects. These deals are an important tool for increasing the value of a business, improving the financial performance of an organization, and achieving competitive advantages.
In the course of M&A deals, business efficiency cannot automatically increase. This process requires maximum efforts, deep knowledge, extensive experience, and most importantly, a well-thought-out strategy for the use of financial resources from all parties to the transaction throughout all stages, from pre-investment and pre-integration, ending with closing the deal and evaluating the synergistic effect.
Many purposes and reasons motivate companies to engage in M&A deals. One of the main reasons is the desire of business to obtain a synergistic effect in the form of achieving the effect of complementarity of the organization’s resources, increasing the overall efficiency of work by reducing the level of uncertainty.
Business restructuring requires maximum efforts, extensive experience, deep knowledge, as well as a well-thought-out strategy for using financial resources from each participant in the transaction at all stages of its implementation – from pre-investment and pre-integration analysis to the negotiation process and closing the transaction, assessing the synergistic effect from it.
Reasons for M&A deal failure
M&A failures in practice are often obvious and can be repeated from time to time. As a rule, the reasons that lead to the failure of the transaction arise due to the lack of a carefully designed organizational process. So, there is the top of 5 most frequent reasons for M&A failure:
- The lack of a well-thought-out acquisition strategy
Following the canons of corporate behavior, risk aversion interferes with the consistent achievement of strategic goals and the creation of additional value.
2. Overestimation of the investment attractiveness of the target company and the expected synergies from the merger
An incorrect assessment of the attractiveness of the market or the position of the transaction partner on it, revaluation of the value of the company being integrated can lead to duplication of core activities or powers, which does not lead to the desired diversification of the business.
3. Top management pressure
The most striking manifestation is the lack of caution when making long-term decisions due to impatience, deviations from the optimal schedule for the transaction due to the desire to achieve momentary positive results, and a predisposition to conclude a transaction due to personal motives of top management.
4. Inaccurate risk assessment
Prior to specific actions on M&A of the organization, it is necessary, from the standpoint of corporate strategy, to conduct a preliminary analysis of the attractiveness of the transaction – due diligence. It is necessary to pay attention to the stage of evaluation of the transaction, namely the degree of correctness of the price set by the interested parties, regulation of the risks, analysis of the preliminary cost of the transaction object. Management often does not include the cost of preventing and minimizing risks in the cost of a transaction.
5. The lack of coherence of working interaction
This often happens when the merging company does not think about the details of the organization and technical support. For example, most companies today use the virtual data room to ensure secure collaboration. It is a digital cloud-based platform that provides a data repository secure file-sharing tools and a reliable workspace.