Despite the significant prevalence of M&A transactions, there is still a reasonably large percentage of unsuccessful transactions. In this regard, it is worth considering the five main pitfalls that parties make and ways to avoid them.
Why do companies decide on M&A transactions?
Trends in mergers and acquisitions (M&A) transactions over the past few years show that this type of agreement does not lose relevance. On the contrary, it is one of the development strategies of any enterprise. Every successful firm in the process of evolution is faced with the decision of which development strategy to choose – an organic growth strategy or another investment strategy, such as growth through an M&A transaction.
The main reason for the restructuring of companies in the form of M&A deals lies in the desire to obtain and strengthen the synergistic effect, the complementary effect of the assets of two or more enterprises, the cumulative result of which far exceeds the sum of the results of the individual actions of these companies.
However, most studies on the effectiveness of mergers and acquisitions show that 60 to 80% of companies, even armed with a potentially winning strategy, do not achieve their goals. It is often associated with errors in integrating companies and the incorrect organization of the transaction itself.
The top 5 M&A reasons to fail
There are many reasons why M&A deals can fail. There are 5 most common pitfalls:
One of the basic components of the transaction is the transfer from the seller to the buyer of all the documentation of the seller`s company. Such documentation, as a rule, includes contracts for the entire period of the company’s activity, licenses, permits, employment contracts with employees, and other accompanying documents. Thus, the preparation and transfer of a complete package of information are one of the main factors for closing a deal.
Lack of communication
Since M&A deals involve the merger of assets and the acquisition of existing customers, it is necessary to analyze the main consumers of the products/services of the selling company. The next logical step is to negotiate with such clients to ensure an understanding of the future activities of the seller company. In such negotiations, the acquiring company will be able to better understand the priorities and needs of the main customers.
Underestimation of the value of the target company and the expected synergy;
Deciding on the practicality of M&A is based on the forecast of the probability of reaching the numerical value of a certain key result indicator, for example, “synergetic value”. An accurate assessment of the effectiveness of transactions provides indisputable competitive advantages by consolidating financial data room pricing, scientific, technical, labor, and other resources and implementing a synergistic effect on this basis.
Underestimation of the human factor
Mergers often fail because of the underestimation of the human factor, and everything must be done to ensure that as many valuable employees as possible remain in the company by the end of the reorganization. To do this, you need to select exactly those who, in your opinion, are indispensable at each stage of the upcoming merger.
Lack of privacy
Maintaining the confidentiality of information during the transaction is an integral factor in its success. Therefore, the professional approach to managing the transaction process is to gradually disclose information that is accompanied by the signing of an appropriate confidentiality agreement.