In transactions as complex as mergers and acquisitions (M&As), many companies encounter pitfalls that can weaken their negotiating positions and jeopardise the success of the deal. This article will show you how to avoid the most common ones.
1. Insufficient due diligence
Sadly, many buyers still rush their due diligence process in order to complete the deal as quickly as possible. While time is always of the essence with M&As, skipping important due diligence tasks can expose your business to far more liabilities in the long term - reducing the likelihood of a successful M&A deal.
This is because without a comprehensive and transparent overview of your acquisition target, the risk of unfortunate oversights increases significantly. For example:
- When Quaker was about to acquire Snapple for $1.7 billion in 1994, their team failed to do a proper analysis of intellectual property and competition.
- As a result, Quaker incurred a daily loss of $2 million after acquiring Snapple, and eventually sold it to Triarc Beverages for $300 million, a loss of $1.4 billion.
While a comprehensive due diligence process does require more time and resources, taking shortcuts is likely to prove far more costly for your business in the long term, as we have illustrated in the example above.
2. A lack of strategic alignment
Even if an acquisition appears to be a great buying opportunity, it may not necessarily align with your company’s long-term strategic goals. The deal may look attractive at first glance or on paper, but after you have finished your due diligence, it may not look like such a good fit after all.
The lesson here is that any merger or acquisition opportunity must align with the company's broader strategic goals. This is why many companies work with M&A advisers to help them assess an acquisition target objectively to determine if it’s a good strategic fit.
3. Cultural clashes that cause the deal to fail
Because ‘culture’ is often difficult to define and isn’t as tangible as finances or intellectual property, it is often overlooked during M&A negotiations. However, if there is a significant difference in the working culture or management style of each company, it won’t be possible to simply ‘blend’ these cultures overnight and hope for the best. Cultural assessments can help you prepare for your post-merger integration and address any issues before they cause any problems.
4. Failing to account for any regulatory hurdles
It can be challenging to navigate different regulatory frameworks across different jurisdictions. If you make any mistakes or ignore these regulations, you may incur substantial penalties. Advisers with expertise in managing M&A transactions in the jurisdiction of your acquisition target can help you navigate these regulations and complete the deal earlier.
If your acquisition target is in another industry with a very different regulatory framework, this is likely to make the M&A preparation and post-merger integration processes more complex.
5. Overestimating your synergies
Being too optimistic about your synergies - the financial gain from combining two companies - often leads to over-valuations. Achieving your desired synergies may be more challenging and time-consuming than anticipated, so it’s important to set realistic expectations and focus on generating long-term returns.
Synergies can take a few years to materialise and are also influenced by factors outside of your control, such as market risk and currency risk.
6. Poor communication
When there is poor communication between parties, this can delay the M&A process and increase the risk of human errors (such as documents ending up in the wrong hands). It is vital to maintain clear, transparent, and consistent communication. M&A advisers can assist in developing a comprehensive communication plan that addresses the concerns of employees, customers, and other stakeholders.
7. Not having a proper post-merger Integration plan
A successful M&A doesn’t just end when the deal is signed; it continues into the post-merger integration phase too. Neglecting this phase - especially the cultural factors we outlined earlier - can make it harder to meet your M&A objectives and achieve your target synergies.
8. Paying too much for an acquisition
This is a surprisingly common pitfall in M&As. Often, companies end up paying too much for an acquisition because they haven't done enough due diligence, which would have exposed other weaknesses in the acquisition target that the buyer could have leveraged to negotiate a discounted price.
9. Unsuitable financing arrangements
If you haven't financed your M&A effectively - for example, by borrowing too much or too little - this could put your company under financial strain and reduce your margins. It's important not to rush this process, as it can be easy to underestimate the level of financing that you may need for your M&A. Will you use debt financing, equity financing, or a combination of both?
10. A sudden increase in employee turnover
Your employees are your company's most important asset. However, M&As that are poorly implemented can lead to:
- Cultural clashes (because culture has not been addressed during the M&A preparation)
- Uncertainty (because employees fear they may lose their jobs)
- Increased workloads and a higher risk of employee burnout (because of a lack of structure planning).
Therefore, you should have an employee retention plan in place to minimise turnover and keep your employees engaged.
Conclusion
Navigating the complexities of M&A requires careful planning, strategic foresight, and an awareness of potential pitfalls. Understanding potential pitfalls and how to avoid them is essential to ensure you achieve your desired synergies. Working with an adviser with expertise in these transactions can help you maximise your returns and achieve a smoother post-merger transition.
