Mergers and acquisitions are quite common, especially in sectors where existing businesses can benefit by pooling their resources to create economies of scale. However, failed M&As are also quite common and the deal is scuttled before it is signed, or perhaps worse, the combined business ends up worse off than the individual companies were before the merger. As experts like Larry Polhill can confirm, there are many reasons that this can happen, ranging from poorly negotiated deals, staff and customer problems, and a lack of transparency. Here are some of the most common causes of M&A failure and how they can be avoided.
Do Due Diligence
Despite the best investigations conducted ahead of the deal, a determined seller can find ways to obscure or bury information that could negatively affect the selling price or could jeopardize the deal altogether. This could include hidden debts, misplaced forecasts, or any other information that could affect the value of the company being bought. While it may never be possible to uncovere everything that someone has made a serious effort to hide, it is always a good idea to conduct your own due diligence if you are considering the purchase of a company. This includes undertaking a careful forensic review of the books if possible, requesting tax submissions, search Court registries for impending lawsuits, and conducting independent market forecasting. Trusting the seller to fully disclose relevant information is a risk that you should not take.
Depending on the method being used to value the company being purchased, the price may take account of current assets, future earnings, returns on investment, and intangibles such as reputation and a skilled staff. If any of these things has been over-valued, then buyers could find themselves having paid more for a company than it is worth. A company that underperforms against predictions can cause serious problems in terms of cash flow, financing and creditor payments. While there is always a bit of room for interpretation, be sure that, as much as possible, you have a careful and complete evaluation of all elements that go into calculating a price for the purchase. Be aware that sellers may be able to increase the value of their business through various practices that may or may not be sustainable – do your own valuation to be sure you have all the information you need.
Without a proactive strategy to manage inevitable concerns that clients may have about their accounts, services etc., after a merger, you may find that that clients may look elsewhere. This is clearly an issue of ongoing concern, but especially if clients begin to leave mid-process, you may find that a company becomes overpriced if the promise of a solid client base was an element that determined the price. Be sure to reach out to clients well in advance to respond to their concerns and to assure them that their accounts will be managed seamlessly.
These are just some of the pitfalls that can complicate a merger. However, they can be avoided with foresight and planning, clearing the way for a successful merger for everyone involved.