Mergers and acquisitions are a type of restructuring or a consolidation of companies that aims to provide growth or positive value to the entities or the acquiring company. Mergers and Acquisitions or M&A allow entities to expand into new geographical areas, acquire new products and expand customer range. M&A is also a strategy to improve profitability and to grow rapidly.
There have been many successful mergers and acquisitions throughout history, such as Disney and Pixar, J.P. Morgan Chase and Co, ExxonMobil and many more. But, despite the continuous increase in the number of M&A, several surveys show that the rate of failures is at least 50%.
Why Mergers and Acquisitions Fail
Anything can go wrong during an ongoing merger and acquisition that even the most experienced senior manager or chief finance officer can fail. The reason for this is that most senior managers and boards of directors don’t give their full attention on the ongoing M&A.
Just like human relationships, an M&A is a two-way lane. The success of an M&A lies in how well the two entities acclimatize to each other’s cultures, says a business consulting firm in Minneapolis. Historical data shows that the common, yet easily avoidable, reasons why mergers fail are the following:
- Negotiation mistakes
- Lack of planning and difficulty in implementing strategies
- Differences in management and organizational structure
- Limited synergies
To avoid such failures, senior managers should have the sufficient knowledge and management tools so they can easily cope if such problems arise during an ongoing M&A. In terms of finance and capital market, mergers fail when the acquiring company pays a premium that reaches above the value of the acquired company.
This may result in valuation mistakes or future activities after the acquisition may not provide a return on investment. Over-payment for acquisitions is also a common problem, in which the senior management may not share the same interests with stockholders.
A successful M&A relies on the behavior of senior managers. Often, M&A’s fail because managers make mistakes in evaluation of the value because they seek to maximize profit, even at the expense of the stockholders. They also tend to act our pressure, which then lead to organizational and methodological problems.
According to the book “Comprehensive Guide to Mergers and Acquisitions,” the authors discuss a strategic fit that requires a (2+2=5) synergy. The measures for a successful merger and acquisition are the increase of the market share and size of sales, the improvement of competitive abilities and a positive change in profitability before and after the merger.
During and after the M&A, the main areas of focus are economics and finance, strategic management and organizational behavior. And of course, senior managers and stockholders should set aside their personal interests and focus on achieving the goals of the merger, both short-term and long-term.