Not every merger generates value, but what differentiates a successful merger from a failing one? There are numerous reasons a merger can fail, including industry-wide disruptions, unexpected macroeconomic shifts, and things outside of the business owner’s hands. However, poor planning and mistakes during the mergers and acquisitions process are more often than not the culprit. Here are a few top reasons mergers and acquisitions fail, and what we can learn from them.
The biggest cause of failure in M&A deals is the mishandling of people and cultures. Every business is different, and so are the people who make the business function. Failing to consider how you will effectively integrate cultures during a merger can ruin your deal. During the due diligence phase, conduct a cultural assessment using things such as diagnostic questionnaires, data analysis, and focus groups. A culture clash doesn’t have to be a deal breaker, but failing to prepare for it is a deal-ender.
Case Study: One of the worst M&A failures ever was largely caused by poor cultural management. AOL purchased Time Warner for approximately $165 billion in 2000. The two companies were titans in the media industry, but they functioned in entirely different ways. AOL had an innovative, profit-driven culture, while Time Warner had a more traditional culture with segregated business units. A failure to culturally integrate resulted in their profitability dropping by nearly 1/3.
While cultural clashing is the leading cause of failure in M&A, poor integration goes hand in hand with it. Integration is a skill that can be refined, but every merger is different, and so are the companies merging. Efficient integration is a multi-stage process, but it starts with due diligence. That cultural assessment we discussed previously is a step towards effective integration– focus on available data, where value is generated, and potential synergies.
Case Study: In 2005, eBay invested $2.6 billion in Skype with the hopes of creating a fully integrated video call software within eBay. This video service would inspire trust, channel communication, and aid in negotiations for sales on their platform. That is, if the video service had been integrated properly. eBay failed to understand its client base well enough to predict that its consumers liked the anonymity of eBay without Skype. This failure and outright rejection from their clientele could have been devastating if eBay hadn’t sold Skype to Microsoft years later.
Synergy is an important facet of mergers and acquisitions, but how is synergy generated? Sharing technologies and audience, best practices, and the actual merger of two companies can produce synergy between businesses and teams. However, it isn’t enough to focus on potential synergies; you need to highlight and address potential synergistic issues. Unrealistic synergistic goals can be catastrophic, particularly to the purchasing company. Failure to address this dissonance with realistic solutions can remove all value from your deal.
Case Study: Quaker Oats and Snapple merged in 1993 when Quaker Oats purchased Snapple for a whopping $1.7 billion. The main problem stemmed from the two companies’ differing audiences: Quaker Oats was a behemoth in the supermarket sector, but Snapple’s audience was found in gas stations and convenience stores. Quaker Oats' poor marketing for Snapple exacerbated the issue, resulting in Quaker Oats losing $1.6 million daily for two years.
To a degree, all the problems we’ve covered were caused by some form of communication breakdown. Devastating cultural clashes can be avoided through conversations with key stakeholders and proper due diligence. Conversing with employees and addressing concerns about cultural integration, job security, and more can help streamline the transition. Conversations with key employees from both organizations can aid in effective integration through realistic, synergistic goals.
Due diligence may be the most integral stage of mergers and acquisitions, due to the importance of pre-deal alignment. It’s imperative that you conduct thorough due diligence to create detailed plans relating to legal structuring, project planning, new assignment of roles, and more. Connecting with legal, financial, and M&A advisors can make this process less overwhelming and set you up for a successful post-deal execution. Planning is only half the process; follow-through is just as important.
Every deal has risk, so don’t shy away from discussing it. Buyers and sellers should conduct their due diligence and should be aware of the value and risks their company brings to a deal. Knowledge is power, and learning more about potential risks creates opportunities to make plans to mitigate said risks. Legal and M&A advisors are important players during this stage of planning, as it’s in their best interest to reduce potential pitfalls.
Cultural clashes, poor integration, and unrealistic synergistic goals are all common deal-ruiners. Major deals expected to generate millions of dollars have fallen apart because of communication breakdowns, poor due diligence, and post-merger integration. None of these things has to stop a deal from closing, but neglecting to respond to these issues in a timely and effective manner can singlehandedly turn a deal from a career-changing revenue booster to a devastating financial loss.
Are you in need of an experienced M&A advisor to help you craft a revenue-generating exit strategy? Connect with Stony Hill Advisors today.