The main reasons why m & a deals fail

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The top reasons why M & A deals fail

Consider the scenario of buying a used car – you can take a few test drives, carefully examine the exterior and interior, and get help from trained mechanics to evaluate the car. Despite all your due diligence, the reality of the used car – whether it's a good buy or a lemon – doesn't become apparent until after you've bought and driven it for some time.

M& A-deals follow similar challenges. They can examine the existing business using visible financials, assumptions about potential adjustment, and consulting help from M& A consultants (the experts) investigate. But the reality only becomes apparent when the deal is done and you have to move the business forward.

The general purpose of a M& A deals is:

  • Grow by acquiring new products, markets, and customers
  • Increased profitability due to the strategic potential of the deal

Losing focus on the desired goals, failure to develop a concrete plan with appropriate governance, and failure to establish necessary integration processes can lead to the failure of an M& A deal lead. The FT Press book notes that" Many research studies conducted over the decades clearly show that the failure rate is at least 50 percent" amounts to.

Reasons why deals fail

  • Limited or no owner involvement : The appointment of M& A-consultants at high cost for various services is almost mandatory in any medium to large deal. But leaving everything up to them just because they get a big fee is a clear sign that leads to failure. Consultants typically have a limited role until the deal is closed. After that, the new entity is the owner's job. Owners should be involved from the beginning and drive and structure the deal independently, allowing consultants to take on the assistance role. Among other things, the inherent benefit will be tremendous knowledge-boosting experience for the owner, which will be a lifelong benefit.
  • Theoretical valuation vs. practical proposal for future benefits : The numbers and assets that look good on paper may not be the real winners when the transaction is completed. The failed case of Bank of America's acquisition of Countrywide is a case in point.
  • Lack of clarity and execution of the integration process : A major challenge for an M& A-business is post-merger integration. Careful assessment can help identify key employees, important projects and products, sensitive processes and issues, avoid bottlenecks, etc. Using these identified critical areas, efficient processes for clear integration should be designed, supported by consulting, automation or even outsourcing options. fully explored.
  • Cultural integration issues: the case of Daimler Chrysler is a study of the challenges associated with cultural and integration issues that have been.This factor is also important for global M& A-transactions quite obvious, and an appropriate strategy should be developed to either make a hard decision, suppress cultural differences, or allow regional / local companies to run their respective units with clear goals and strategies. Profitable.
  • Required capacity potential vs. current bandwidth : Agreements for the purpose of expansion require an assessment of the current company's ability to integrate and build upon the larger company. Are your existing company's resources already fully or excessively utilized, leaving no bandwidth for the future to make the business successful? Have dedicated resources (including yourself) assigned to fill necessary gaps, as needed? Have considered time, effort and money for unknown challenges that may be identified in the future?
  • Actual cost of difficult integration and high cost of recovery : The case of Daimler Chrysler also led to high cost of expected integration attempts that could not be enforced. Providing bandwidth and resources with proper strategies that could outpace the potential costs and challenges of integration would have helped. Investments that spiral into difficult integration over the next few years may have difficulty recovering in the long run.
  • Negotiation errors: cases of overpaying for an acquisition (with a high consulting fee) are also common when executing M& A transactions to be widespread, leading to financial losses and thus failures.
  • External factors and changes in the business environment : The Bank of America / Countrywide failure was also due to the collapse of the financial sector as a whole, with mortgage companies being hit the hardest. External factors may not be fully controllable, and the best approach in such situations is to look ahead and avoid further losses, which may include stopping the business entirely or making similar tough decisions.
  • Evaluate alternatives : Instead of buying to expand with the goal of outperforming competitors, it pays to look at a sale target and exit with better returns to start something new? It helps to consider extreme options that may prove more profitable rather than sticking to traditional thinking.
  • The backup plan : if more than 50% of the M& A-transactions fail, it is always better to deactivate a backup plan in a timely manner (with / without loss) to avoid further loss. The above examples are cited as failed, but they appear to have executed the de-merger in a timely manner.