Mergers and Acquisitions are dealt with selling, buying, combining or dividing of contradictory companies and business entities, as this being a complicated process it’s no secret that a lot of mergers or acquisitions collapse. It can sound so simple: just combine few departments, merge the computer systems, use sheer size to force down the price of supplies and the merged giant should be more profitable than its parts. In theory, As usual 1+1 = 3 sounds great, but in practice, things can go awry. Statistical data says the failure rate of mergers & acquisitions lie between 75-90% and consequences of a bad deal are savage and detrimental for businesses, so they should never be taken lightly.
Here are some of the reasons that why M&A’s fail:
- Wrong strategy:
If the acquisition is too far outside the parent company’s proficiency, things aren’t likely to work. Insufficiently detailed administrative plans and failure to identify key interdependencies while merging with another business can cause a lot of frustration.
Has the acquirer a clear strategy in which changes will add value? If a company sets a plan which brings it down, it will get into trouble. So major mistake is to keep hopes with a fallacious strategy and instead find a better estimated strategic fit.
- Working capital adjustments:
Mergers & Acquisition transactions typically include a working capital (W/C) adjustment as an integrant or attribute of the purchase price. The acquirer wants to insure that it acquires a target with sufficient W/C to cover-up the requirements of the business post-closing, including obligations to customers and trade creditors.
Working capital is required in businesses for the survival of the firm, but if a company doesn’t take the W/C in consideration while settling then any ambiguity with consideration to M&A’s can result into financial consequences.
- Did not consider the alternatives:
Has the acquirer considered the balance between organic growth and acquisition? Acquisition is just one business development tool, so basic thing is to consider the alternatives. Assessment of alternatives helps to consider extreme options which may prove more profitable, rather than holding onto the routine thoughts.
For eg: Toyota entered the luxury car market successfully through Lexus (contrast this with Ford, who paid a premium for Jaguar, subsequently faced high integration costs and found that its cost per car was much higher than that of Lexus).
- Weak leadership:
You need a strong and a wise leader in business, whom everyone can trust and complete the tasks. A leader-who projects energy, enthusiasm, clarity, and communicates that energy to all. Although acquisitions and mergers are supposed to create new and vigorous organizations but if the senior managers or partners are themselves not interested in making work the merger’s mission, then the whole process becomes useless.
So weak leadership is major factor for failure of mergers and if the ways of working do not match the vision and values that company aspires then the credibility is also lost.
- Getting the culture wrong:
Just because your two companies are in the same industry doesn’t mean you’ve got the same culture. Major problems come from the sometimes- awkward mash-up of two distinct cultures in business.
Most experienced people have developed a set of practical and effective tools for culture integration because a cause for trouble in businesses is culture encounter which further leads to demoralization and defections.
- Lack of clarity and execution of integration:
A major challenge for any M&A deal is the post-merger integration. A careful appraisal can help to identify key critical areas, and using these areas, efficient processes for clear unification should be designed, supported by consulting, automation or even outsourcing options being fully explored.
But remember, not all mergers fail. Size and global reach can be beneficiary, and strong managers can often squeeze great coherent work out of badly run rivals. Nevertheless, the agreements made by deal makers demand the heedful inspection of investors too. The accomplishment of mergers depends on how pragmatic the deal makers are or on the negotiation skills of deal makers – how well they can integrate two companies while perpetuating day-to-day operations.
Another sad fact is that most deals look great on paper, but few organizations pay genuine notice to the merger process—that is, how the deal will actually work once all the paperwork is signed.