The Anatomy Of An Acquisition Failure: Why They Often Fail To Create Value

Understanding the anatomy of an acquisition failure before you think about entering into an M&A deal raises success rates. It is a well-known fact that the failure rate of M&A transactions stands anywhere between 70% and 90%.

Several factors contribute to deals falling through, and exploring the potential pitfalls helps you avoid them during negotiations and integration. Companies enter into mergers and acquisitions to take advantage of blended synergies.

Their objective is to economize on costs and save on R&D and innovation expenses by acquiring IP and intangible assets. Pooling resources also helps them capture a larger market share, raise their manufacturing capacities, and diversify financial risks.

Adding a broader product range to their portfolio and attracting investment can also be on their list of goals. Ultimately, the entire exercise is all about sustainability in an intensely competitive sphere and long-term scalability and profitability.

Considering these many benefits, companies are not averse to investing in their search for viable projects and partners. So much so that dealmakers spend over $2T on acquisitions per year despite the shocking failure rate.

The first step in the right direction is exploring the anatomy of an acquisition failure by researching the worst failures. Delve into the reasons why the M&A deals fell through and make sure to avoid them.

Anatomy of an Acquisition Failure – Lack of Owner Participation and Enthusiasm

The process of screening potential acquirers for a merger is a long and complex process that needs expert guidance. This is why owners typically choose to retain the services of a professional M&A advisor specializing in such deals.

Identifying the right partners for a merger can raise the chances of its success by 35%. Having an expert on board can help get you there. However, it is also advisable for owners to remain involved in the proceedings and participate proactively.

Seller or buyer–dealmakers should be the driving force behind the transaction and structure it from the start. Rely on the M&A advisor to do just that–guide your efforts in the right direction. Making this effort ensures complete transparency throughout the deal.

As a result, dealmakers minimize uncertainty across their respective organizations and keep the key stakeholders in the loop. Buyers also develop a better overview of the business they’re acquiring. This understanding will go a long way during the integration process.

Missing Top-Tier Executive Buy-In

Building a positive outlook toward the merger and supporting its benefits starts at the top tiers of the company’s management. You’ll need to communicate with the top executives of both organizations to convince them of the shared vision and objectives.

Also, talk about the expected rewards and how they will trickle down throughout the new company. Make sure they understand the potential risks and pitfalls that can hamper the rewards from meeting expectations.

Getting executive buy-ins and support will ensure that all information and intelligence relays to the other employees as well. You’ll ensure their active involvement from end-to-end and assistance with drawing up detailed plans that will facilitate the merger’s implementation.

This assistance will prove invaluable when you’re executing the amalgamation of two distinct cultures and operational workflows. Aspects like these feature in the anatomy of an acquisition failure.

Incomplete Due Diligence

Due diligence is one of the key factors that results in an M&A deal failing to materialize. Dealmakers are typically unaware of the importance of due diligence before and after the deal is final. Most tend to rush through the process, overlooking potential risks.

Targeted companies may withhold unfavorable information that can stall negotiations. Acquirers rely on them to provide all the essential data relevant to the deal. Not conducting detailed research can lead to unpleasant surprises later.

However, efficiency in the due diligence process facilitates 42% of successful M&A deals. The areas where you’ll focus attention include financials, management, stockholder agreements, clear ownership titles, regulatory compliance, and pending litigation.

Also, examine all contracts and agreements the company has and any other obligations it has entered into. Identifying any potential liabilities that can cost the company in terms of penalties and loss of reputation is also crucial.

Incorrect Valuation

Valuing the targeted company inaccurately is high on the list of reasons M&A transactions don’t pan out. This is why it is crucial that negotiations are value-driven rather than the FOMO. Focusing on the metrics ensures that buyers don’t overpay for the targeted company.

Acquirers could be anxious to capture market presence in a geophysical location or in a specific business vertical. Or, buyers may anticipate the development of Intellectual Property or product designs that don’t happen.

In other words, they may miscalculate the value the targeted company brings to the table. As a result, the acquisition price could be far above its fair value, which ultimately leads to the merger failing. Buyers may incur huge losses after the deal. Some may even have to liquidate the acquired venture.

The price paid for startups typically includes cash and stock options, which may also result in failed deals. That’s because identifying the owners and entities who ultimately benefit from the deal can be complex.

Dealmakers also tend to invest far more in the actual transaction than necessary in their urgency to crack the deal. If the profits don’t cover the costs, the entire merger fails to generate the expected value.

Don’t forget to factor in the fees you’ll pay to the legal team and M&A advisor facilitating the deal.

Ineffective Integration

Integrating two entirely distinct companies with different cultures, workflows, and organizational rules can’t be easy. This is why owners must come up with a detailed integration plan that accounts for all the potential pitfalls. Lack of this planning is part of the anatomy of an acquisition failure.

Mergers fail because the workforce is unable to integrate and work in coordination, leading to costly disruptions and confusion. Lack of communication can also lead to the surviving company losing key stakeholders like core talent, customers, and vendors.

Careful planning should include identifying essential employees, main revenue-generating products and projects, and sensitive workflows. Estimate potential snags that can lead to operations coming to a halt and prepare for them.

While your M&A advisor can help you navigate these hurdles, you also have the option to deploy AI and automation. Don’t hesitate to outsource the integration process to trained agencies. Efficient planning and integration execution can raise the chances of the merger’s success by an astonishing 48%.

Keep in mind that in fundraising or acquisitions, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

 

Inability to Integrate Cultures

Instituting a culture, mission, and values is one of the cornerstones of a successful startup. But, these factors can also become a hurdle when two distinct companies are ready to merge. Employees resisting the new culture and unwilling to adapt can lead to stressful and conflicting situations.

Dealmakers may want to factor in cultural differences when negotiating the value from the merger. Exploring and understanding whether the culture is compatible can raise the chances of success by 38%.

However, the inability to recognize and address this minor issue can lead to losses worth billions. Also, recognize the risk of top talent choosing to leave the company because of a new culture they have trouble adopting.

The lack of proper leadership they associate with leads to delays in making decisions. But also in communicating them to the people on the ground.

You can streamline the cultural amalgamation with careful planning, preferably hiring HR consultants to aid in the process. Alternatively, consider allowing the two companies to continue functioning independently with shared goals. The ultimate objective should be profitability and scalability.

Also, consider one-on-one interviews with employees to address their problems. Suggestion boxes and emails for feedback and swift action to resolve conflicts will help in executing a successful union.

Don’t underestimate the cultural differences that are a crucial aspect of the anatomy of an acquisition failure.

Lack of Communication

Effective communication is one of the most essential aspects of a successful M&A deal. From the time owners start to scout around for viable projects up to the execution and even after. Breakdowns in communications with key stakeholders can jeopardize the merger, leading to heavy losses.

You’ll set up an in-house team that is familiar with the company operations and culture and assign them the task. Dedicate the time and resources to developing a series of messages to be relayed at every stage of the process.

Keep your stakeholders informed about how the merger impacts their relationships with the company at all times. Target both internal and external stakeholders, customizing messages to cater to their concerns. However, your messages should be consistent across the board.

Internal stakeholders include the employees and top-tier management, while external stakeholders are investors, vendors, customers, and federal regulators. You’ll also connect with the general public on social media and news forums and broadcast information and updates.

Regular communication reassures people that their interests are secure while opening up channels for feedback and complaints. Make sure the communications team considers each carefully and responds to positive and negative responses. That’s how you’ll maintain branding and reputation.

Lack of communication leads to speculation and mistrust and is another key aspect of the anatomy of an acquisition failure.

Misunderstanding Synergies and Resources

Integrating synergies is the primary objective of the merger, where companies pool together resources for long-term growth and sustainability. Understanding these synergies and how they combine is of utmost importance in a merger.

Being realistic about what both companies can contribute is crucial. For instance, the acquirer doesn’t have the capacity or bandwidth to include incoming employees and product development divisions.

Alternatively, the targeted company may have reached its maximum product ideation capabilities. Or market saturation or may not have been able to capture markets across state lines. When negotiating the M&A transaction, dealmakers should account for the time, resources, and sweat equity needed to resolve such issues.

Miscalculating Costs & Resources for the Acquisition

Acquisitions and mergers are not exactly cheap, and companies must prepare to invest significant money toward finalizing the deal. Aside from regulatory fees and charges, you’ll plan for recovery costs related to integration and eliminating redundancies.

Financial issues account for a large part of the anatomy of an acquisition failure. For instance, the acquired company may be in financial difficulties. A fact that did not come to light during the due diligence process.

Typically, startups that are smaller in size than the acquirer are suitable since recovery costs are low. However, at times, the buying company needs to take on debt to cover the costs of the acquisition. In that case, they might want to rethink the deal.

Running lean operations is a valuable skill entrepreneurs should learn when establishing a new company. These strategies come in handy during acquisitions and mergers. Check out this video where I explain cost cutting strategies for startups. You’re sure to find it helpful.

Unforeseen Circumstances

Despite ticking all the boxes, mergers fail to deliver adequate value to survive. Even after instituting failsafe measures and accounting for potential risks, dealmakers cannot foresee external factors.

For instance, industry disruptions can lead to product redundancy or changes in customer buying trends. The pandemic was another instance where entire industries bore the brunt of lockdowns. The travel and tourism were some of the sectors that were most affected.

Let’s try another. The collapse of the financial sector resulted in the mortgage vertical taking a huge hit. In more recent times, companies not aligned with environmental protection and conservation values are noting declining sales and customer support.

Have Alternatives and Contingency Plans in Place

Considering the exceptionally high risk of mergers failing, acquirers may want to explore alternatives to purchasing a company. Outsourcing R&A to independent agencies or retaining advertising teams could be better options.

You could explore options to bridge the gaps in the company that do not involve investing in a buyout. More importantly, work with your M&A advisor to come up with a contingency plan in case the merger proves to be a liability. Be prepared with solutions like a de-merger to cut your losses and disengage.

The Takeaway

Regardless of the precautions and due diligence you take when evaluating startups for acquisition, the chances of failure are high. Several factors can contribute to the failure, including cultural issues, miscommunication, difficulty in integration, value destruction, and the sheer costs.

Raise your success ratios with careful preplanning for integration and compatibility. Explore the synergies you’re hoping to acquire and their probability of integrating into the surviving company. You’ll also retain the services of expert M&A advisors who can guide you through the possible pitfalls.

Work with them to build failsafe measures and understand the anatomy of an acquisition failure before diving in.

You may find interesting as well our free library of business templates. There, you will find every single template you will need when building and scaling your business completely for free. See it here.