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

Source: “Making Strategy Work,” by Lawrence Hrebiniak, by Pearson Education Inc. Publishing as Wharton School Publishing, New Jersey, 2005

 

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.

Citations

  • https://hbr.org/2016/06/ma-the-one-thing-you-need-to-get-right
  • http://knowledge.wharton.upenn.edu/article/why-do-so-many-mergers-fail/
  • https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/where-mergers-go-wrong
  • http://www.bain.com/publications/articles/ma-success-and-failure-only-30percent-of-ma-deals-benefited-the-shareholders.aspx
  • https://www.govcon.com/doc/kpmg-identifies-six-key-factors-for-successfu-0001

Further Reading

Articles
Get Strategic Due Diligence Right or Small Problems Turn into Big Problems Why M&A Synergies Are Often Overvalued Industry Analysis: Know where to play What Are the Foundations of Your Growth Strategy? Exit Strategy: How to Find The Right Strategic Buyer
White Papers
M&A Strategy: Unlock Multiples of Value