Jan 23 ‘23 14 min read
The number of mergers and acquisitions that happen across all industries each year is staggering.
According to Statista, in 2021 alone 63,215 M&A deals were completed worldwide. But what is even more surprising is learning that the majority of these will prove to be failures in the long run. The unequivocal fact, reported by research from the Harvard Business School, is that the failure rate of M&A deals is between 70% and 90%.
Why on earth is that? Why do most mergers and acquisitions fail?
What happens when a merger fails?
Before getting into the reasons for the failure of mergers and acquisitions, let’s define exactly what “failure” means in this context. A failed M&A deal can mean two different things:
First, it can mean a planned deal where one or both parties backed out before completion, so that the merger or acquisition never happened in the first place.
Second, a failed merger or acquisition can mean a deal that was carried out to completion, but failed to deliver the anticipated results.
Throughout this article, we’ll focus on this second meaning of “M&A failure”. So, in order to learn what exactly failure looks like, here’s a quick reminder of what are the most common goals of M&A deals.
Why do companies do M&A deals?
At first glance, there are many reasons why companies merge with or buy other companies. They may be after any of the following potential synergies:
- Access to new markets
- Increased market share
- Risk diversification
- Material resources
- Non-material resources
- New corporate capabilities
- Economies of scale
- Tax benefits
At the end of the day, however, all these goals of M&A boil down to just two. As Harvard Business Review puts it, there are two reasons to acquire a company:
- The first, most common one, is to boost your company’s current performance — to help you hold on to a premium position, on the one hand, or to cut costs, on the other (…)
- The second, less familiar reason to acquire a company, is to reinvent your business model and thereby fundamentally redirect your company.
What this means is clear: a failed M&A deal is one that:
- Damaged the company’s performance, or
- Failed to make it transition to the desired new model
Either way, it fails to create the expected revenue synergies and increase the share price. But in practical terms, what exactly happens to companies when a merger or acquisition fails?
What happens after a failed merger or acquisition?
After a failed acquisition, the acquiring company usually ends up selling the target company for a much lower price than what it paid for it.
In the case of failed mergers, the company may break into different subsidiaries that then get sold, as happened to Citigroup after the Citicorp and Travelers merger. In cases where things get really bad, the entire company may get sold to a private equity that specializes in distressed investing — DaimlerChrysler can tell you a thing or two about this.
So now you know what happens to companies after a failed M&A deal, we can go on to the main theme of this article: what are the most common reasons why M&A fail, and how you can avoid them and make sure your merger or acquisition is successful.
But before we do that, how about educating ourselves a little more, by looking at a few other cases of failed M&A deals?
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Examples of recent mergers and acquisitions that failed
- Rio Tinto — Alcan. Back in 2007, during a bidding war with Vale and Alcoa, Anglo-Australian mining multinational Rio Tinto bought Canadian mining company Alcan for 38.1 billion. Due to the 2008 financial crisis, and China entering the aluminum market, the deal did not bring about the expected returns, and the target company ended up being broken into several subsidiaries and sold to different companies.
- HP — Autonomy. In 2011, following its strategy of moving from hardware to software production, Hewlett-Packard acquired the UK software company Autonomy for 10 billion. What HP executives didn’t know was that Autonomy’s accounting improprieties would force them into a 8.8 billion write-down of Autonomy’s value. HP ended suing Autonomy co-founder Mike Lynch for fraud, in a legal battle that lasted until January 2022.
- Microsoft — Nokia. In 2014, Microsoft bought Nokia’s phone business for 7.2 billion. Soon after the deal, Microsoft CEO Steve Balmer was replaced by Satya Nadella, who shifted away from the phone business, and so completely defeated the purpose of the acquisition. Microsoft ended up cutting off nearly 10,000 Nokia employees and writing off over 8 billion.
- Wesfarmers — Homebase. In 2016, Australian conglomerate Wesfarmers acquired company from the UK, Homebase for 340 million. Bad management decisions — such as firing Homebase’s senior management team, and abandoning products that were popular with UK customers — resulted in disastrous losses of over 600 million. Only two years later, Wesfarmers sold Homebase to restructuring specialist Hilco for the symbolic price of £1.
- Pfizer — Allergan. Now this is an example of a failed merger in the first sense — where the deal never went through. In 2016, these two pharmaceutical giants were to merge, so that Pfizer could save 1 billion annually in taxes by moving its operations to Ireland. However, the US government passed a law barring such operations from happening, and the merger had to be canceled.
So, these are some of the M&A failure stories. If you want more cheerful content, here are success stories of recent M&As that took place in 2022.
Why do mergers and acquisitions fail — and what can you do to ensure yours is successful?
According to the 2021 Statista survey, the main causes of M&A failure worldwide are:
- Poor cultural fit and lack of trust among parties
- Lack of commitment from senior management
- Unclear objectives, strategy and metrics
- Unclear governance and decision-making structures
- Flawed data and incorrect analysis
- Inability to retain key people
- Overpaying for the company
- Uncontrollable external factors
Main factors for failure of M&A deals according to M&A practitioners worldwide 2021
As you can see, all the reasons listed above are not mutually exclusive — quite the contrary. For instance, 36% or respondents indicate that lack of commitment from senior management is a cause why mergers fail, and 30% say that the inability to retain key talent is another cause.
In fact, the latter problem is at least in part a consequence of the former, since absent bosses will most often make good employees want to leave the company. What this means is that when you go through the list below, you must keep in mind that these are all interlinked factors, and that you need to tackle them all simultaneously.
1. Poor cultural fit and lack of trust among parties
A poor cultural fit occurs when businesses misunderstand the companies they are purchasing or merging with. This can happen in many areas — companies can misunderstand:
- Leadership teams
- The client base
- The ambience
- The culture of the country where the other company is located
Naturally, cultural differences and misunderstandings lead to a lack of trust between two companies.
Companies can be a cultural mismatch for several reasons. What you must do to counter it is to identify the possible causes and deal with them before they create problems. Before, during and after the merger, make sure that:
- All information you have about the target company is comprehensive, in-depth, and reliable (by the way, here’s a guide for cybersecurity due diligence in M&A).
- Information is communicated widely and effectively — everyone knows what they must know about the other company.
- People respect their new colleagues, and are willing to learn from them.
- Everyone is committed to making this a successful deal for both parties.
Of course, sharing information before and during an M&A deal can be tricky — after all, some of it is usually confidential. But with our data room comparison page, it’s easy for you to choose the best data room to share sensitive information efficiently and securely.
2. Lack of commitment from senior management
Business owners are often overwhelmed by their responsibilities, and they delegate responsibility for the merger to their team. However, this can leave gaps in the implementation — unless the team are themselves seasoned professionals, they may lack adequate insight and make errors in judgment.
Lack of commitment from senior management can also happen when the people responsible for the deal leave key positions before the integration is carried out, and are replaced by others with a different vision or agenda.
- Make sure that your company puts senior executives in charge of the M&A deal, and
- Keep the company owner abreast of what is going on
- Bring in the other senior managers, even if they are not directly responsible for the deal, — this will make them feel respected, give them the opportunity to share any advice they may have, and help them take an interest in the success of the merger or acquisition
Additionally, you can use data rooms for M&A to ensure all information is organized and quickly accessible to everyone involved.
3. Unclear objectives, strategy and metrics
Unclear objectives means there is no agreement on what the company leadership really wants from the merger. Unclear strategy means they haven’t defined how they will achieve their M&A goals. And unclear metrics means they haven’t decided on how to measure success or failure.
To be more concrete, let’s take an example. Often, in M&A deals, investors’ interests are not the organization’s interests — the merger makes sense from an investment point of view, but not from a business point of view.
In cases like this, the company ends up with unclear objectives: sure, the short-term goal is to increase the company’s stock price — but what exactly do they want for the mid- and long-term?
If your company is going into an M&A deal, it must have clear objectives and a clear plan. This means:
- Conducting in-depth due diligence
- Understanding what your company wants vs. the realistic chances it has of actually getting there by means of this deal, and avoiding unrealistic expectations
- Knowing the motivations of buyers and sellers, and what the transaction risks are
- Drawing a strong plan for the merger
- Agreeing on clear metrics to measure progress
4. Unclear governance and decision-making structures
One thing is certain: if you want something not to get done properly, just say “somebody do this”. Because when people aren’t clear about who is responsible for what, they misunderstand and neglect tasks, or else do them double.
After a merger or acquisition, there are processes that can be replaced or eliminated, positions that become redundant, tasks that become superfluous. Lack of clarity over who is responsible for what decisions in the new company poses a serious threat to a successful merger.
- If necessary, redraw the hierarchical structure of the company, making sure the chains of command remain clear.
- At the same time, ensure there’s space for people to be heard — this is important at all times, but particularly now.
- Make it clear who is responsible for what.
5. Flawed data and incorrect analysis
We’ve touched on this in the first point — but data and information problems are behind pretty much every other issue too. And it’s not all about not having enough data. In fact, having a lot of data can result in misinterpretation. For instance, in a business’s valuation report, the parties will always present numbers assuming the best case scenario — but staying in touch with the actual figures is vital.
- Get enough information during due diligence and after it.
- Remember data itself is not knowledge — it needs proper analysis.
- Check our comparison of VDR providers, so you find the best software to store and share your due diligence data.
6. Inability to retain key people
Companies are made of people. If a merger or acquisition causes the best people to leave the company, it’s unlikely it will achieve its goals. Unfortunately, this is what happens in one out of every five M&A deals — and it is also hubris that “leaves key team members out in the cold, which leads to poor morale, lack of support for the transaction, and unwanted departures”.
- Map the talents of the target company.
- Make sure decision-makers know who they are working with and why.
- Respect and value the professionals and leadership teams of the other company.
- Remember employees of all levels are people — make them happy and they will want to stay.
7. Overpaying for the company
A common mistake made by companies engaging in acquisitions is that they pay way more than the company’s intrinsic shareholder value — as Rio Tinto did when it bought Alcan. As the saying goes, “every business is for sale when the buyer is willing to overpay”. However, this is something that you should avoid if you want your company to remain profitable.
- keep a margin of safety while valuing a business
- manage negotiations to keep the price as low as possible
- stick to your predetermined limit
8. Uncontrollable external factors
The best laid-out plans can get off track if the economy takes a sudden and drastic turn or if any other condition beyond your control changes abruptly. Unexpected changes in interest rates or economic forecasts, governmental regulations, and other external factors can affect your business plans significantly — witness the failed Rio Tinto-Alcan acquisition and Pfizer-Allergan merger.
While you can’t control external factors, you can pay extra attention to them, and work with a worst-case scenario. “Hope for the best, expect the worst” is a good rule. This way, if the worst does happen, you will be covered, and your company will be able to weather the storm without high recovery costs.
Before you go through with an M&A deal:
- During the due diligence process, get comprehensive, in-depth information, and analyze it carefully.
- If a company is overpriced above your capabilities, don’t go through with the acquisition.
- Take into account the external factors that are beyond your control and work with worst-case scenarios.
During the deal and post-merger integration:
- Continue getting comprehensive, in-depth information, analyze it carefully and share it widely.
- Make sure people on both sides understand the similarities and differences between the companies and respect each other.
- Bring senior managers on board.
- Agree on clear merger or acquisition objectives, draw a solid strategy and decide on the right performance metrics.
- Make it clear to everyone who is responsible for what.
- Remember employees are people and keep them happy.
If your company is considering an M&A deal, this is how you will help it and greatly increase its chances of being among the 10% M&A successes of the year.
Harvard Business Review studies show that 70-90% of M&A deals fail. The main reasons for failures are considered to be the key people leaving their positions, disagreements within teams from different companies, and demotivation in the acquired company.
The most common problems with mergers and acquisitions are flawed data and incorrect valuation, overpaying for a target business, low involvement of the owners of the merging businesses, limited resources in a newly formed company, and ever-changing economic aspects.
The most common reason for the failure of an acquisition has to do with the difficulty of integrating two companies into one. Thus, the acquiring company faces high costs when investing in new processes or systems of the newly created company.
When an M&A transaction fails, it is crucial to agree on a termination process in advance. But remember that the exit from the transaction must be properly organized so that you have a chance for other M&A in the future. For this reason, it is recommended to involve an independent third party, consultant or lawyer for assisting with the exit.