With the vast number of failed mergers and acquisition deals – found to be 60 per cent of all M&A transactions – it is no doubt that there are many issues that can arise during a deal. Clearly even the most experienced companies fail to overcome the challenges of M&A deals. Therefore, to successfully navigate a business integration, it is useful to first understand the dynamics and identify various generic and deal-specific issues upfront. Although there is a long list of problems that can occur, we have compiled the key issues in mergers and acquisitions and tips on how to go about them when they arise.

What are Mergers and Acquisitions?

Let’s start with the basics. Mergers and acquisitions (M&A) is a general term that refers to the process of two companies consolidating into one through a number of financial transactions. There are a number of reasons for pursuing an M&A deal, including to stimulate growth, gain competitive advantages, increase market share, or influence supply chains.

According to the International Journal of Economics, Commerce and Management, the M&A process can be separated into 11 distinct stages. These include:

  1. Formulating corporate strategy
  2. Developing acquisition strategy
  3. Conducting a broad scan of acquisition targets
  4. Undertaking a detailed review of acquisition targets
  5. Identification of potential targets and carrying out due diligence
  6. Examining the financing options and completing the due diligence
  7. Obtaining approval of and announcing the decision
  8. Undertaking post-merger planning
  9. Closing the deal
  10. Post-merger integration
  11. Post merger redesign

Many companies have identified that the majority of issues in an M&A transaction occur in the due diligence and post-merger integration stages. Therefore, it is important to note that M&A requires more than a quick scan through financials and piles of contracts. It is essential to carry out comprehensive research and communicate with all stakeholders, even those with a small stake.

Key Issues in Mergers and Acquisitions

1. International Relations

With the rapid rise in business globalisation, many if not most M&A transactions will entail a consolidation with a company in more than one country. Due to the worldwide nature of M&A, companies will often deal with foreign markets that they have little to no experience in. As a result, these companies are venturing into not only foreign countries but foreign cultures.

One of the most well-known international mergers that ended in failure is the Daimler-Benz merger with Chrysler in 1998. This failed M&A transaction highlighted that cultural differences and organisational culture cannot be ignored on a global level. Companies with different cultures find it difficult to make decisions quickly or correctly or to operate efficiently. Therefore, when conducting the initial review of acquisition targets, it is important to acknowledge any local practices and principles of corporate culture in the target location.

2. Staff Retention

The Top 5 Key Issues in Mergers and Acquisitions 

One of the key issues involved in integrating companies is staff retention. Understandably, employees often react negatively towards M&As, as they feel intimidated by the sudden change in leadership and strategy. For this reason, employees tend to have increased uncertainty in job security, future business success, location changes, wages, and job responsibilities.

Remember: employees and their knowledge are one of the most invaluable resources necessary throughout the M&A process.

High employee turnover can heavily disrupt workflows and business continuity; resulting in additional time to train and transfer business processes and policies. Therefore, during this transitional process, to avoid high turnover, it is important to maintain trust and engagement with staff and keep them well-informed of the status.

3. Miscalculating Synergies

Overestimating synergies has emerged as one of the dominant barriers to effective integrations. Countless M&A deals have failed to provide value to the purchaser due to poor evaluation, resulting in overpayment. Companies often enter M&A deals with an overly optimistic outlook about the potential payoff and underestimate how long synergies take to realise benefits. If you are setting unrealistic expectations too early on, you could be miscalculating outcomes of decisions and therefore unnecessarily accruing costs. By adopting early measures and establishing an analytical, researched approach to due diligence, you can reduce the risk.

To avoid miscalculation of synergies, take the approach of conservatism. This will involve looking at a suitable value for that firm as a limit, but not a target. On the other hand, consider using a virtual data room to coordinate files, establish and keep track of the due diligence workflow, safely share information, and provide a comprehensive deal overview. This will ensure all stakeholders are on the same page and expectations are aligned.

4. Security Threats

When two companies integrate, there is a multitude of sensitive information being shared amongst all parties. Technology plays an important role by not only enabling the integration but also driving the new business operating model. It brings in an entire range of cyberattacks, and a poor cybersecurity position can delay the company’s acquisition process and, in some cases, also be a deal-breaker.

Therefore, here are a number of things you can do to reduce security threats:

  • Acknowledge security threats from the beginning – identify the cyber risks and costs from the deal outset
  • Identify the deal-specific financial exposure – how much liability is there?
  • Seek to offset any security threats in negotiations, through contract terms and valuation

5. Lack of communication

The last of the top 5 key issues in mergers and acquisitions, is the lack of communication with all shareholders. Although this may seem obvious, the truth of the matter is that communication can make or break a deal. Ensuring all parties are in the loop before, during and after an M&A transaction will ensure that the change occurs as smoothly and effectively as possible. Communication should be frequent, consistent, transparent, honest and efficient. Lack of information flow from the upper levels of management will cause problems for the first-line managers and supervisors who need to deal with the frontline employees every day.

Final Thoughts

Companies today are consolidating in record numbers. However, the M&A process is becoming increasingly convoluted and complex. Therefore, it is important to obtain assistance from experts for valuations, legal advice, integrations, and sector-specific inputs. Similarly, premerger due diligence will unearth things that could affect the proposed transaction and ways to manage issues that may undermine desired goals.

Are you looking for your next business opportunity? BUSINESSNAV can assist private enterprises in the merge and acquisition of businesses across a broad range of industries. We access available databases to help identify potential mergers and acquisitions targets based on your business objectives.

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