According to a Business review report by Harvard, the failure rate of mergers and acquisitions is often as high as 70% to 90%.
For something that happens all the time in the business world, M&As have quite a high failure rate. Regardless, this doesn’t faze companies a single bit, as they go ahead with their own M&A deals. However, while we can go on and on about how companies manage to make M&As work to their advantage, let’s talk about something more important i.e., why they fail.
A question that isn’t asked nearly enough, aspiring business owners and entrepreneurs, will make the mistake of taking a merger lightly. Mergers should never be taken lightly. And although you can say that underestimating mergers is a major reason, an even bigger one would be how small business owners don’t pay much attention to their due diligence.
But it is not the only reason why M&As tend to fail. Let’s look at the five most common reasons why M&A due diligence seems to fail so often.
Why M&A Due Diligence Fails So Often
There are plenty of reasons why an M&A deal can fail, and it can often be traced back to due diligence itself.
1. Integration Obstacles
Mergers always tend to carry a very significant problem with them. Mergers do not only merge two different companies with varied styles of working, but they also merge radically different employees. Merging two businesses on paper can seem incredibly easy, especially if both of them are in the same industry. But in reality, this can come with its own slew of challenges.
Different people from different cultures and a completely different work ethic merging can experience a troublesome process. Things between the employees can get especially undesirable if the upper management fails to properly communicate with middle management. If the management fails to set a proper plan for introducing new members to the new business, things can also get a little dysfunctional among the employees.
It is safe to say that the biggest obstacle that a merger holds to employees is a drop in morale as well as productivity and efficiency. These obstacles have to be accounted for during due diligence.
2. Inaccurate Data and Valuation Mistakes
The data that a company uses during due diligence paves the way for the future. So, if companies take in overly idealistic valuations and lofty projections, this can prove to be quite a problem. Now granted, these companies will try to achieve these expectations, but that doesn’t change the fact that they are still quite lofty expectations.
While making decisions during the due diligence process, owners of both companies must keep very realistic expectations. Surely, a company would want to provide the best and most enticing numbers to the other to close a deal. But the unfortunate truth to the matter is that the real numbers are much lower. The best-case scenario often doesn’t follow a fresh merger, seeing how employee morale is considerably lower.
The simple solution to this problem is that the owners of both businesses have to keep more realistic expectations for their merger. And they should also use more accurate data when evaluating just how profitable a merger may be.
3. Limited Resources
When a company is willing to merge with or acquire another business, not only do they need a plan for integrating its employees comfortably, but they also require an immense amount of capital. Firms can sometimes underestimate the amount of capital they require for merging two different firms. Taking on cultural differences and varied work ethics can be difficult, especially when firms don’t have too much capital on their hands.
There is often a shortage of staff, and policies will need updating to compensate for the new employees. Other than the increase in staff and new policies, your new company may even require more real estate to accommodate for these increments. All of these changes are massive and will require a lot of capital. Of course, if the company fails to provide these resources, this will lead to reduced morale, which can be quite dangerous for both new and old workers.
4. Insufficient Owner Involvement
Now, M&As are, without a doubt, one of the most complicated endeavors that a company can undertake. Therefore, getting a professional to oversee all of the key issues of the merger is essential. But a mistake that most business owners make is that they instill a little too much trust in the professionals they hire and have minimal involvement throughout the entire process.
Since business owners are so busy running the business, they can’t give time to the merger. However, these experts are not going to be running the company; the owners are. And once these experts are out of the picture, the leaders of the new entity may not have enough or any insight into the business, its expectations, and current circumstances.
5. Lack of Planning
Finally, the most important reason why M&A deals fail is because of a lack of planning or strategy and also technologies like due diligence data rooms. Due diligence plays, and always will play, a major role in M&As. It looks over all of the possibilities of the new entity and helps measure just how beneficial it will be for each party. So, companies that do not pay attention to the due diligence phase are doomed to fail from the start.
As most business owners are more focused on closing a deal, they are often unprepared for the aftermath of the merger. Since they are not prepared, the smallest of problems can prove to slow down the new entity greatly.
Due diligence is integral to any merger or acquisition, and yet it is also a major reason why most mergers fail. But even though mergers can have a very high rate of failure, the pros clearly outweigh the cons.