Why M&A Deals Fail

M&A deals fail more often than not. Study after study put the failure rate at over 70%, including Harvard Business School¹, Wharton School of Business², McKinsey³, Bain⁴, KPMG⁵, and many others.

WHY YOU NEED TO KNOW

These statistic are highly relevant to prospective buyers because the consequences of a failed deal have lasting devastating effects. Here are the most common pain points that companies feel as a result of a failed M&A deal:

• Massive write-downs. The acquisitive company incurs significant losses because the seller proves to be less valuable than initially estimated (e.g., HP / Autonomy).
• Weakened competitive position. The acquirer foregoes the window of opportunity to field its strategy (e.g., Yahoo / Broadcast).
• A damaged reputation of the acquirer. Bad deals tarnish the credibility of the acquirer’s management team. (GE / Honeywell / string of ill-timed M&As).
• Loss of valuable talent. When the benefits of a merger don’t add up, executives start leaving almost immediately after the merger (e.g., Sprint / Nextel).
• Divestiture of the seller after the deal. The acquirer realizes that the deal was a mistake and divests the seller, usually at a loss (e.g., Quaker Oats / Snapple).
• Financial bankruptcy. The acquisitive company cannot sustain the significant loss caused by the failed deal (Peabody Energy / Macarthur Coal of Australia).

WHY DEALS FAIL

So, why do M&A deals fail? Quite simply, mergers and acquisitions fail to deliver due to poor planning or poor execution or both. Exhibit 1 lists some of the elements of poor planning and poor execution that cause poor M&A results.

Exhibit 1. Determinants of Failed Mergers and Acquisitions

Poor planning and poor execution happen for a reason. At a basic level, some acquirers are first-time buyers who lack the experience and the capability necessary to succeed in the competitive M&A market.

Also, M&A transactions typically occur under tight deadlines, and few companies have the internal resources available when needed.

Finally, acquirers can get caught in the common buyer missteps that arise in a competitive M&A environment and have a lower chance of finding quality assets. However, things don’t have to go this way.

UNLOCK M&A VALUE

So how can you get the most to succeed in your M&A deal? Successful acquirers can serve as valuable guides. Great examples include Corning, Flowserv, Eaton, Precision Castparts, Berkshire Hathaway, and Koch Industries, to name a few. These companies follow a discipline of acquisitive growth that delivers more growth and creates more value than their peers. Here are the specific steps they take:

• Drive a compelling strategic rationale for the deal
• Undertake rigorous due diligence
• Conduct a bottom-up valuation of the stand-alone cash flows
• Size synergies top down and bottom up
• Set a price limit based on the value of the standalone business, synergies, and control
• Start planning a logical approach to execution before closing the deal

So, if you are contemplating an acquisition, take a disciplined approach to develop your M&A strategy, avail yourself of external expertise and sharpen your capability. It will increase your odds of success.