Imagine you‘re buying a used vehicle, a car for instance. You’re going to want to make sure that the car is in useable condition and to this end, you may take a few rides in the car or hire a trained mechanic to carefully examine the car, both exteriors and interiors to pass the verdict on the usability of the car. Despite all diligent efforts, you will truly know the car only after you purchase it. Whether you spent your money on a good product or did your money go to waste will be evident only after you do spend the money. Reasons, why Mergers and Acquisitions deals fail, is closely related to this above-provided anecdote of the car purchase. The top law firm in India will help you in mergers and acquisitions deals.
The challenges faced by M&A deals are more or less similar to the car problem. You will in all probabilities inspect an existing business on its assumptions of potential fit, visible financial numbers with the help of experienced M&A advisors.
However, you will be presented with reality only when you have to handle the business and move it forward. The goal of any M&A deal is simple enough – marked growth and expansion of business from acquiring new products, markets and customers, and an increase in profits. The latter comes as a causal effect of the former. However, often the deals fail. Hence it begs the question-
What exactly is meant by “Failure”?
A quick online search will lead you to the fact that anywhere between 50% to 90% percent of M&A deals fail or are unsuccessful. The percentages, however, do not mean deals that fail to close but deals that do close and then fall apart because it was not working out. A deal failing could mean any of the following:-
- The buyer incurs a massive write-down later as it admits the seller wasn’t valuable.
- There’s a mass departure of talent from the seller and in the worst-case scenario, the founder(s), management team all leave.
- The buyer has to divest the seller as it realizes the deal was a blunder.
- The buyer ends up bankrupt.
So, why do Mergers and Acquisitions Deals Fail?
Along the way focus on the desired objective is lost, or there is a lack of integration and concrete plan that leads to the decay of an M&A deal. Below elucidated are chief five causes behind the failure of an M&A deal.
- Valuation in theory as opposed to the practical reality of potential benefits.
The assets and numbers of the business may look spectacular or if not that, potentially profitable on paper. However, it may cancel out as a winning factor once the deal is through. Bank of America’s failed acquisition of Countrywide is a good example of this.
- Inadequate involvement of the owners.
Hiring experienced advisors for an M&A deal is almost necessary to mandatory and often that is attained at a high price. Often it happens that the deal in entirety with all its intricacies is left to the advisors to sort out. That is a clear indication that the deal is going to fall through. Involvement from owners is of utmost importance. Owners instead of taking a backseat should help develop the structure of the deal and drive the process. This strengthens the foundations of the deal because nobody knows a business like its owner.
- Vagueness in execution and lack of clarity in the integration process of the merger.
Identifying critical areas of the business, key employees, crucial projects, products, sensitive matters always prove beneficial to the integration of a merger and acquisition. However, a major challenge in any M&A deal is the preliminary identifying and using these identified critical areas for efficient integration. In many cases outsourcing is not fully explored or the process is not assisted by a consultant. And so the deal fails due to the ineptitude in the quality of integration.
- Negotiation errors.
In some cases, the seller is overpaid for an acquisition coupled with a high advisory fee leading to financial losses and bankruptcy.
- The required potential of capacity versus current bandwidth.
The deals with the goal to further expand require a thorough assessment of the business’s capacity to integrate and build upon the larger business. Often the existing business’s resources are over-utilized, leaving no bandwidth for the future.
To conclude, it can be said that any M&A deal intending expansion and benefits is not always successful. The majority of such deals may result in failure due to the above factors and more. Business owners, both buying and selling parties, hired Advisors and all associated parties must be alert and vigilant about all the aspects of the merger. The matter can also be taken up to Mergers and acquisitions law firms for a transparent insight.