We’ve been measuring how successful acquisitions are since the 1970s, and it is well documented that the failure rate of M&A is around 70%. With all of the money at stake, why haven’t we got better at M&A and the Post-Merger (Acquisition) Integration in 50 years?
This is the big question in the M&A and Integration industries that many have tried to answer. Unfortunately, there is no magic bullet; the answer is not simple. It would require a series of books, not a blog entry to discuss this in detail. Let’s touch on a couple of topics in this blog.
Areas of Failure
Failure can come from any of the three broad phases of mergers and acquisitions:
- Selecting an acquisition target
- Negotiating the deal
- Acquisition (Post-Merger) Integration
Here are a couple of causes of acquisition failure that fall into the first two of those items.
Acquiring Outside Your Business Strategy
All businesses should have a strategy that is woven into the tapestry of their business model. Stick to this path. Think beyond the deal to when the two businesses would be together.
- Do not find synergies that are not there. If your businesses are different, consider how these will fit when the dust has settled, in three years or so
- Avoid the temptation to acquire a bargain that doesn’t fit. Do not acquire businesses over lunch. because you like the person you’re sharing a meal with
Example: Acquiring Over Lunch
You are the owner of a business, and have a personal relationship with the owner of another. You have lunch together, both see the advantage in growth through acquisition, get on well, get excited and can see some overlap. The two resolve to find a way to make the deal work.
The deal took place, but the expected growth doesn’t take place. The two businesses can’t take advantage of the other. Eventually they spin off, or kill off the acquired products.
You pay too much for an acquisition
For many reasons the price of the acquisition is too high:
- You got into a bidding war
- Something was missed in Due Diligence
- The team didn’t understand or negotiate the best terms in the deal
- The true cost of an acquisition integration and operations was not appreciated
- The acquisition advisors were financially incentivized to have a higher sale price
- The acquiring team were emotionally invested in the deal and lost objectivity
Example: The Train-Wreck Deal
A deal takes on a life of its own. Individuals in the deal team can see it is a stretch to get value from the larger business. Nobody has the ability, or the nerve, to tell management (and perhaps the public) that it is not in the best business interests to continue. In short, stopping the train-wreck deal would have been worse for their careers than completing the deal.
To accommodate the higher-than-expected price, acquirers will subsequently have to change the business plan and the integration strategy. Perhaps they will have to reduce staff, invest extra money into the larger business, or direct sales focus to a different market or different sized prospect.
I threw a couple of hypothetical examples in this blog, but I suspect that many readers will know a true story or two that are close to what I wrote. For those doing the deal, acquisitions can be fun, however they must execute their job and do the best thing for the business and for the people inside the business.
Playing the cards you’re dealt
No matter how good or bad the deal is, when it is time for the integration team to merge the people, operations, processes, technologies and cultures of the businesses together, they must play the card that they’ve been dealt.
Read more of our blogs on this topic for more insight: