There are a number of reasons why M&A deals fail, and educating yourself and your team can help mitigate some of the M&A risks. This blog post will examine these five common pitfalls:
- Poorly conceived strategy or lack of strategic clarity
- Paid too much
- Cultural incompatibility
- Lack of due diligence
- Executive leadership turnover
Let’s dive a little deeper!
Poorly conceived strategy or lack of strategic clarity
The purpose of the integration was perceived, but not realistic. A lack of the big picture alignment and thoughtfulness about the long-term strategy can lead to a host of issues down the road, well after the dust has settled from your M&A deal. A well thought-out and coherent M&A strategy needs to be established for your organization to ensure all of the parts, especially a newly acquired one, work together to improve and enhance the overall organization. Major components of the strategic planning cycle include: mission and vision statement, organizational values, goals, objectives and action or performance plans all align.
Paid too much
The value calculated did not relate to value received. This puts a financial strain on the company. Some companies feel they have to overpay to block a competitive bid or to gain market share. But when too much is paid, it can lower the chance to achieve a satisfactory return on investment.
Cultural incompatibility
We generally see this in vertical integrations. Workplace cultures can vary widely, and you’ll want to ensure as much as you can that the workplace company cultures are similar enough that they will integrate smoothly without major issues that will cause significant time, money, and stress on the organization.
Lack of due diligence
The buyer did not spend enough time developing the due diligence process and/or the wrong people were included in the process. Often, there can be a disconnect between company development teams and deal integration teams. Main deals fail to integrate well due to failure to bridge this gap. Thus, proper planning should be performed not only on the financial side of things, but on the day-to-day operations side of the equation as well. You should create as many different possible scenarios as possible to ensure a good M&A integration and efficient team collaboration. Due diligence is of the utmost importance, as it will highlight the inner-workings of the organization being acquired so issues can be flagged, evaluated and worked through.
Executive leadership turnover
A significant number of top-management executives leave during the first year after the acquisition (an average of 24% of the top management team departs). This represents a postacquisition turnover rate almost three times higher than normal. Research shows that one-third left voluntarily for reasons that had nothing to do with the acquisition, one-third were involuntarily terminated and the last one-third reported that they departed because they felt alienated from the new top management team or were made to feel that their participation in the new management team was no longer valued. When a senior executives depart, a leadership vacuum is created in the acquired company that must be filled. Executives from the acquiring firm, however, often lack the firm-specific knowledge needed to quickly step in and make informed strategic decisions. In many cases, however, replacing the most senior executives in the acquired company is viewed as having significant symbolic value. It signals that the acquiring company is in charge. It’s important to have honest conversations with your top-management teams.
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