Avoiding M&A pitfalls
Improving growth and business confidence usually triggers a flurry of M&A activity. Bold CEOs will use M&A to outflank competition, build strategic capabilities and drive profitability. Sounds like a winning formula If only these deals are a proven way to improve financial performance. Numerous studies have shown that in 60-80% of cases, acquisitions and mergers have not led to long term increases in shareholder value. While many of these failures can be attributed to business reasons, a great number can be blamed on the failings of human psychology and corporate culture. Issues such as organizational bias, management self deception and weak planning can all contribute to poor M&A performance.
Below is a list of the most common deal foible we have seen, with further insights provided by strategy+business magazine.
Deals are often difficult to walk away from because they take on a life of their own. Since they have invested so much of their time, effort and career equity, dealmakers will typically feel intense psychological pressure to shepherd the deal through to completion. This pressure can lead to managers favouring information that supports the deal while ignoring information that should give them pause. In other cases, transaction urgency is institutionalized and magnified by a reward system that emphasizes deal completion over ROI. Finally, significant momentum or ‘deal fever’ can often take over an M&A process leading to management blinders around transaction risk or the cost of the deal.
Many organizations regularly and inadvertently deceive themselves into thinking they follow M&A best practices when in fact they don’t. For example, managers often delude themselves around the extent of their market knowledge, only to bump against deal-breaking information deep into the process. While companies may have a disciplined M&A approach (designed to reduce risk and streamline their efforts), they will regularly ignore the process out of laziness or arrogance. Finally, leaders will frequently over-estimate their firm’s capabilities and under-estimate competitive threats, resulting in a significant increase in deal risk and resources required.
The numbers trap
Naturally, many companies focus on the purchase price as the primary way to make the business case work. However, an over-emphasis on the price ignores many other vital factors that can significantly impact long term value and cost. These include: the cultural fit between the firms; the ease of post-acquisition integration and the availability of talent in the target firm.
The myth of confidentiality
It is rare that prospective deals stay under the radar for very long, particularly when low to mid-level managers become privy to the process. A confidentiality breach can have major consequences including: a rapid and unexpected rise in the target firm’s stock price (suddenly making the deal less attractive); inciting a competitive response or; provoking turnover in the target firm.
Given the size of many deals, one may be surprised to learn that many companies under-plan around what should happen after the deal is consummated. This occurs for two reasons. In the rush to do the deal, managers put off what they think could be easily done after closing. Secondly, the people running the deal usually lack the expertise to plan and implement the messy work of post-transaction integration. This lack of attention will quickly derail the initiative and push out the time to value.
There is no bulletproof way to making every M&A deal work. However, CEOs can improve their odds of success by avoiding these pitfalls.
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