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Examining the Reasons Why Mergers and Acquisitions Fail
Mergers and acquisitions bring a wealth of benefits to the table, but not every business deal is a success. Some ...
Mergers and acquisitions bring a wealth of benefits to the table, but not every business deal is a success. Some M&As lead to embarrassing failures that require years of recovery. Many of these failed deals started promising but failed to hit the mark. It's easy to look back at the data and point out the "obvious" reasons they didn’t work, but it feels much less obvious to the people in the situation at the time. As the old cliche goes, hindsight is 20/20. Still, you can learn a lot from reviewing the top reasons why mergers and acquisitions fail.
Table of Contents
- Common Reasons Why Mergers and Acquisitions Fail
- How To Address the Top Reasons Why Mergers and Acquisitions Fail
- The Role of Technology in the Reasons Why Mergers and Acquisitions Fail
Common Reasons Why Mergers and Acquisitions Fail
When merging two businesses, there are a lot of potential failure points that could impact the final result. Here are some of the most common ones to look out for.
Lack of Cultural Fit
In 2016, AT&T made the bold move to merge with Warner Bros. The New York Times reports that people initially welcomed the merger and expected great success. However, a few years later, AT&T gave Warner Media to Discovery and spun off its assets. So, what went wrong? Former Time Warner executives said the creative and vibrant culture that took years to build died in mere months of the merger.
When two distinct corporate cultures collide, it can lead to misunderstandings, clashes, and, ultimately, failure of integration. The cultural aspect is vital to employee satisfaction, retention, and overall productivity. If the cultures are incompatible, it can result in internal strife and reduced productivity, which undermines the potential benefits of the merger or acquisition.
Despite its importance, cultural fit is often weighted differently than financial and strategic factors during decision-making. However, companies that do not pay attention often pay the price later on.
Poor Due Diligence
Due diligence is the detailed analysis conducted by a buyer to confirm information that is pertinent to a transaction. It allows potential buyers to thoroughly assess a deal's value and uncover any potential financial, legal, or operational risks.
The purchase of Twitter, now called X, illustrates why inadequate due diligence is one of the top reasons why mergers and acquisitions fail. Experts at the time warned that the bid seemed driven by sentiment rather than numbers during the on-and-off-again deal. A month after Elon Musk had already bid for the company, he contacted professionals for assistance with due diligence.
Musk did not like the findings of this due diligence but was compelled to go through with the bid he had placed. The end result was a mass exodus from Twitter. Core employees, top users, executives, and advertisers began to pull away from the platform, which paved the way for Meta's Threads and other competitors to become viable alternatives.
Overvaluation and Overpaying
When business owners fail to do due diligence, the risk of overpaying is high. Elon Musk acknowledged that he overpaid for Twitter and said it is worth 50% less than he paid. By May 2023, experts estimated that Twitter’s value had dropped to a third of its selling price. However, some might argue that the change in management style also played a role.
Overpayment typically happens when the acquirer's expectations about synergies and future cash flows are overly optimistic. An overvalued deal can place a considerable financial strain on the acquiring company. Always complete a rigorous valuation process and make decisions based on facts and figures to avoid overpayment, because it is one of the top reasons why mergers and acquisitions fail.
Ineffective Post-Merger Integration
The post-merger integration phase is a determining factor in the success or failure of a merger or acquisition. During this phase, the strategic and operational benefits of the deal are realized. However, ineffective post-merger integration can derail these benefits, resulting in a failed M&A.
Ineffective integration can stem from several factors:
- Lack of clear communication
- Insufficient planning
- Failure to promptly address employee concerns and uncertainty.
Create a detailed integration plan before sealing the deal. It should cover all aspects, from IT infrastructure to culture. Communicate the plan effectively throughout both organizations to ensure a smooth transition and successful post-merger integration.
Ineffective People Management and Change Management
Musk’s bold management of Twitter made the news around the world. CNN Business reports that it only took him six months to upend his reputation and the Twitter brand. A number of former employees shared stories of feeling overworked and fearing job loss. Others stated they did not receive their severance packages after termination. In some cases, Musk turned to his public Twitter account to handle private matters with current or former employees.
During a merger or acquisition, there is a significant amount of change that employees must navigate. If not managed effectively, this change can lead to uncertainty and anxiety among employees.
Uncertainty can negatively impact productivity and lead to increased turnover. Communicating effectively, involving employees in the decision-making process, and providing necessary support are crucial during this transition period to ensure a successful merger or acquisition.
How To Address the Top Reasons Why Mergers and Acquisitions Fail
Failure isn't permanent. Many businesses fall into a rough patch and then emerge stronger than before. Knowing how to address problems that arise can help you turn obstacles into successes.
Deciding To Persevere or Fail Fast
This is a tough call to make. When you fail fast, you accept losses quickly. Doing this can ensure you don't get carried away with pouring resources into a failing venture. However, there are times when further investment and new strategies are necessary to turn a bad deal around. It takes time and experience to know when to choose one over the other. Managers must accept that no one answer suits all situations.
Investing in Cultural Due Diligence
This is key to ensuring a merger or acquisition doesn't fail due to incompatible cultures. Cultural due diligence requires thorough research and understanding of the target company's culture. It should also involve open conversations with employees at all levels to better understand the company's values and how they are reflected in day-to-day operations. Organizational psychologists can assist with this aspect of the merger.
Transparent Personnel Planning
During a merger or acquisition, personnel planning should be transparent and well-communicated. Companies should focus on providing employees with job security and clarity about their roles in the larger organization. Employees should also have clear visibility into any changes to their salary and benefits packages, as this can help reduce uncertainty and anxiety during the transition period. Managers should also inform them of changes in their roles.
Merged companies can waste resources when they allow redundancies to remain. For example, does the merged unit need two HR departments or two separate licenses for the same software? When eliminating redundancies affects people, returning to transparent personnel planning is essential to get core workers onboard with staying put. Managers can accomplish this by making severance packages a better option than simply quitting.
The Role of Technology in the Reasons Why Mergers and Acquisitions Fail
Technology is one of the less talked about aspects of a merger, but it can also impact the transition. Companies that use vastly different systems must find a middle ground, or one company must make a significant change. For example, imagine if BigTechCompany uses Microsoft products, but SmallTechCompany uses only Apple. When they merge, creating an IT ecosystem that works well for everyone would take time.
At Cloudficient, we specialize in Microsoft products and provide invaluable services during a merger or acquisition process. Our time provides the necessary technical support to harmonize the disparate IT environments of merging companies. We use our expertise in cloud services to ensure a smooth transition.
Don't let technological disparities become one of the reasons why mergers and acquisitions fail in your organization. Choose Cloudficient and put your M&A on the path to success with seamless, efficient, and well-managed IT integration.
With unmatched next generation migration technology, Cloudficient is revolutionizing the way businesses retire legacy systems and transform their organization into the cloud. Our business constantly remains focused on client needs and creating product offerings that match them. We provide affordable services that are scalable, fast and seamless.