6 Reasons Why Business Acquisitions Fail

We have all seen or heard of high-profile cases where Mergers and Acquisitions (M&A) deals didn’t work out. AOL–Time Warner, HP-Compaq, Quaker-Snapple — these are just some of the big ones. Most deals look great on paper, but few organizations pay proper attention to the integration process —that is, how the deal will actually work once all the paperwork is signed.

The FT Press book states that “Many research studies conducted over the decades clearly show that the rate of failures is at least 50 percent”—basically a coin toss. Perhaps such deals should come with an official warning: “Acquisitions can result in serious damage to your corporate health, up to and including death.”  Acquisitions can be a very difficult experience for the business owner. However, if done correctly it can reap the greatest rewards.

So, who does a failed M&A affect most?

The consequences of a bad deal are far greater for a mid-market company than for a big corporation. Large companies usually have enough managers and resources to patch things up. Most mid-market companies lack the finances or bandwidth to absorb a bad deal.

Why do M&A deals fail?

1. Misgauging strategic fit.

If the acquisition is too far outside the parent company’s core competency, things aren’t likely to work. A company that sells to its business customers chiefly through catalog and Internet sales ought to be very cautious about acquiring a company that relies on direct sales – even if the products are, broadly-speaking, in the same industry. Similarly, a company whose traditional strength lies in selling products to businesses might want to think twice before making a foray into a consumer-oriented business. An honest strategy audit up-front is the answer: don’t stray beyond your core competencies, and ask whether the target company fits your strategy, your operations, and your distribution channels.

2. Not waiting for markets to sort out.

You know you need to get into a promising new space, but it’s quite unproven and you suspect running two or three concurrent experiments might bleed cash for years. So, in a real sense, you can’t afford to run too many such risky projects. But if you let entrepreneurial startups run the experiments with their energy, time and capital – and let them ring out the technology risk and the market risk – then once a winner appears, you can buy that winner with capital off your balance sheet. The key is often to watch and wait until markets sort out, and business models are proven. Then success acquisitions are often the ones subjected to the most careful and sober-minded competitive and market analysis prior to pulling the trigger.

3. Getting the deal structure or price wrong.

We all understand that if the acquiring company pays too much in an auction environment, it’s going to be tough to get the acquisition to show a positive ROI. To protect themselves, some acquiring companies like to structure acquisitions with half or more of the purchase price held back based on achievement of future performance hurdles. But watch out: such earnouts can backfire on the acquiring company in unexpected ways. If, for instance, a major payment milestone is based on post-acquisition sales performance but 99 percent of the salespeople are working for the parent company – and therefore are neither aware of nor incentivized by the sales milestones – then the acquired company employees may well feel demoralized due to having scant control over achieving major payment milestones.  The best bet is negotiating a fair price up-front.

4. Erosion of business fundamentals.

Let’s face it. Integrating two companies is a lot of work and it can be exhausting. Often, the same people responsible for running the business are tasked with planning and executing the integration as well. This double workload can wear people out. And, often, the urgent demands of integration take precedence over the fundamentals of running the business. As business fundamentals begin to erode, people tend to blame the problems on the merger. This can begin a vicious downward spiral of reduced revenues, sinking profits, and customer defection.

5. Increased profitability based on strategic potential of the deal.

Losing the focus on the desired objectives, failure to devise a concrete plan with suitable involvement and control, and lack of establishing necessary integration processes can lead to failure of any M&A deal. For example, Wendy’s USD 2.3 billion merger with Arby’s in 2008 was a disaster, which forced the split and sale of Arby’s in 2011. Apparently, Arby’s lack of international exposure made it a misfit to Wendy’s.

6. Lack of clarity and execution of the integration process.

A major challenge for any M&A deal is the post-merger integration. A careful appraisal can help to identified key employees, crucial projects and products, sensitive processes and matters, impacting bottlenecks, etc. Using these identified critical areas, efficient processes for clear integration should be designed, aided by consulting, automation or even outsourcing options being fully explored.

As a business owner, you need outside advice to keep your emotions in check. Acquisitions and mergers fail mainly due to key items are overlooked during the due diligence process. At BDeWees Consulting we understand the importance of a smooth transition. We can assist you in the smoothest transition possible so that your business will obtain the profitable growth that was anticipated with the add on acquisition. Contact our firm today for more information.