Mergers and Acquisitions: Why They Can Fail

A 2015 article in Forbes referenced a KPMG study that said some 83% of mergers fail in one form or another. The article deemed failure as the failure to enhance shareholder value. In other words, 1+1 did not equal three as was hoped prior to the combination.

Some reasons mergers and acquisitions fail, or at least are not as successful as hoped, include:

Flawed Intentions

A booming stock market encourages mergers, which can spell trouble. Deals done with highly rated stock as currency are easy and cheap, but the strategic thinking behind them may be easy and cheap too. Companies whose stock has reached high levels may want to use it as currency to expand, but the planning needed to make a successful business combination happened might not be their priority.

A merger may often have more to do with glory-seeking than business strategy. The executive ego, which is boosted by buying the competition, is a major force in M&A, especially when combined with the influences from the bankers, lawyers and other assorted advisers who can earn big fees from clients engaged in mergers. Most CEOs get to where they are because they want to be the biggest and the best, and many top executives get a big bonus for merger deals, no matter what happens to the share price later.

On the other side of the coin, mergers can be driven by generalized fear. Globalization, the arrival of new technological developments or a fast-changing economic landscape that makes the outlook uncertain are all factors that can create a strong incentive for defensive mergers. Sometimes the management team feels they have no choice and must acquire a rival before being acquired. The motivation may be that they need to be bigger to survive, or they may view a merger or acquisition as the best way to acquire the knowledge and expertise needed to compete.

Poor Communications

All too often, there is too much emphasis on getting the deal done and too little on proper communication between the two companies, especially with the rank and file in both companies. It is natural for employees to feel threatened by the business combination, especially if it is an acquisition and they work for the target company.

Communications from day one of the process can go a long way towards facilitating a smoother transition and towards a successful execution of the post-merger business strategy.

The chances for success are further hampered if the corporate cultures of the companies are very different. When a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored. It's a mistake to assume that personnel issues are easily overcome. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code. These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity.

The External Landscape

Mergers and acquisitions are not done in a business vacuum. There are competitors, customers and vendors/strategic partners to consider. It’s important to manage all of these relationships.

Keep your customers informed. Let them know how the combination will impact them and hopefully of your plans to enhance your service.

Competitors will be trying to take advantage of any uncertainty that your customers might be feeling. Communicate with you’re the customers of both firms frequently.

Be sure to reassure vendors and business partners that they are a valued part of your strategy, otherwise they may look towards working with other companies, perhaps even your competitors.