Have you ever wondered why mergers fail despite the immense value that might have otherwise accrued to the entities involved? In this post, we give you reasons why several mergers fall flat.
Mergers and acquisitions typically happen for two significant reasons:
- To facilitate growth by acquiring new products, markets and consumers
- To increase profitability based on the strategic potential of the deal
Unfortunately, the success rate of mergers and acquisitions is not usually as high as one might expect. In fact, the Harvard Business Review reports that between 70% to 90% of mergers and acquisitions fail.
If you are new to the world of mergers and acquisitions or your company is exploring this possibility, you may be wondering why so many deals fail. After all, it is only natural to assume that when two companies come together, they should create a bigger and more powerful entity that will deliver more value for all stakeholders.
While this is true in some cases, there are other circumstances where it simply does not work out well. In this post, we examine six fundamental reasons that cause failure of mergers and acquisitions.
1. Changing company culture
One of the major reasons for failure of mergers and acquisitions is a clash in company culture. [Tweet that]
This is a problem that arises, particularly when there is a wide gulf between the values and operating styles of the companies involved. An example of this is the Daimler-Chrysler merger.
When two companies merge, it can be like a group project in the sense that two different sets of people are coming together to create a product. If the situation is not effectively managed, it could create friction that would undermine the anticipated benefits of the merger.
Another issue that might arise is lack of alignment between the vision of senior management and the expectations of workers. These differences can swiftly escalate to conflict if unchecked, leading to lowered productivity and team morale.
2. Lack of adequate due diligence can make mergers fail
Another common reason why mergers fail is a lack of due diligence. In other words, the companies involved failed to thoroughly investigate each other before taking the plunge. Conducting due diligence ensures that both companies have all the information they need.
It is typically during this process that potential problems in one of the companies are revealed. To be clear, conducting due diligence does not mean looking for dirt or making any malicious move. Instead, it is a process where the companies involved learn important details about one another, such as the state of their finances and any issues that could impact future success.
When this is not properly done, the new company will have to deal with problems that might have been avoided had things been done correctly. A case in point: The Bank of America-Countrywide Debacle.
3. Competition from existing rivals
Threats by rival companies in the same industry is another reason for the failure of mergers and acquisitions. In this case, these rivals may do everything they can to either prevent the merger from happening or to prevent it from succeeding. This can happen in various ways. For example, the rival companies could file lawsuits against the merger. They might also wage a media war in a bid to sway the shareholders and customers of the companies involved in the merger.
4. A high debt profile or large required capacity
Mergers could also fail due to heavy debt burdens from either or both companies or a large capacity required to run the new company. Sometimes, companies do not take into account the capacity they need to integrate and build up the more significant business they are creating. These companies typically already have their resources fully utilized, leaving no bandwidth for creating success with the new company.
In the Bank of America-Countrywide case, the Bank of America inherited many debts from the different lawsuits plaguing Countrywide. While Bank of America did not commit any of the crimes for which Countrywide was sued, they were the ones that had to face the music and make the required payments.
5. Limited owner involvement
When planning mergers, it is common practice to appoint advisors for various services, which is a good move. However, it becomes detrimental when the owners of the companies in question leave everything to these advisors.
In an ideal situation, these advisors should only have a limited role. Owners should be involved right from the start and be active in driving and structuring the deal. The advisors should simply be assisting.
Apart from having a front-row seat to watch the merger take place, owners will gain tremendous experience from the process, which will be a lifelong benefit for them and the new company.
6. Poor integration process
The post-merger integration period is challenging for any merger because this is when they are most likely to run into problems with productivity.
The new company’s leadership should carry out a careful appraisal to identify key employees, crucial projects and products, sensitive processes and matters that may cause bottlenecks. If this is not done, they may find it challenging to navigate the post-merger integration successfully.
Even when this appraisal has been done and the critical areas identified, the company must go further to decisively address the issues. It is important to design efficient processes that will facilitate successful integration. This should be aided by consulting and an innovative approach that affords the company many options.
Conclusion
Mergers can fail for so many reasons that it is impossible to predict with absolute certainty that a given deal will be successful.
Because of this, it is crucial for those exploring the possibility of a merger or acquisition to do everything they can to ensure the deal is successful. This means conducting thorough due diligence, making sure the companies involved are compatible and preparing for any potential issues that might arise.
In summary, it is important to count the costs, consider all factors, and have all the important information before determining if a merger or acquisition is the way to go. A careful analysis might reveal the pursuit of organic growth as a more practical alternative.