Shareholder/Founding Partner at Hart David Carson LLP, representing & counseling mid-market, pre-IPO companies
Mergers and acquisitions are lengthy and complex processes, and as such, there’s a lot that can go wrong in the course of negotiating a deal. By looking at some of the most common causes for these failures, you can take preventive measures to improve your odds of success, both in terms of closing the deal as well as negotiating something that’s profitable for all parties.
Reasons Deals Fail To Close
There are a number of reasons why M&A deals might fail to close, including:
Differences in valuation: The issue might simply be a difference in how each party values the organization being bought. Often, the seller might overvalue themselves, believing the company will increase in value in the future (despite past data), or the buyer might do their best to lowball them.
For instance, a buyer might think it’s a good deal to offer $20 per share to a company currently selling at $16, but if the seller’s average price over the past year was $27, they could turn it down.
MORE FOR YOU
Lack of owner involvement: Another point of failure is a lack of owner involvement. If everything is left to an adviser, the lack of input from the owners can slow the process down, potentially delaying the deal to the point where it never closes at all.
Even if the deal does close, limited owner involvement can still have ramifications afterward since the deal might not be structured in a profitable way.
Lengthy due diligence: Due diligence is a vital part of any transaction, but it is possible to overdo it. If due diligence keeps getting extended over and over, it can get to the point where the deal is eventually forgotten.
Your due diligence efforts should be limited to information that’s relevant to the deal itself. The goal is to make sure you’re making a profitable decision. Anything in excess of that just makes the process cumbersome.
‘Deal breaker’ terms: Many of the terms involved in M&A transactions have little or nothing to do with the price, and any of them could cause either party to call off the deal.
For example, there might be differences in desires for management retention, or one company might have working capital requirements that the other is unwilling to take on. The buyer could want a noncompete clause that the seller’s management team rejects outright. In these cases, the needs of one party or the other are denied by the terms proposed in the agreement, getting an automatic “no” and causing the deal to fail.
Office politics: Finally, a simple ego could get in the way of a deal closing. One person might try to use the deal to move up the ladder, another might try to block them, others might want to get on someone’s good side for this or that reason — it can get messy.
The best counter to this is to create a positive corporate culture where everyone works together as a team, but that’s not likely to happen in the middle of M&A negotiations.
Reasons Deals Fail To Be Beneficial
Even if the deal does manage to close, it can still be considered a failure if it doesn’t prove profitable down the road. Post-transaction failures can take a number of forms, including:
• Writing down the seller’s value.
• Divesting the bought company.
• Losing talent as people leave the seller’s company.
These failures could result from:
Poor due diligence: While you don’t want to overdo your due diligence, it’s still important to be thorough. Your due diligence research should include:
• Red flags, such as ongoing litigation, excessive customer contracts, etc.
• Value of assets and stocks.
• Resources needed to continue doing business.
• Key personnel.
• Vital products and projects.
• Sensitive processes.
Without proper due diligence, it’s easy for the buyer to inherit liabilities and expenses that would otherwise cause them to call off the deal — or at least change the terms — if they were aware of them.
Cultural mismatch: Sometimes, the failure comes from a simple cultural mismatch. Sometimes two companies’ cultures are compatible. Sometimes they are not.
This mismatch in corporate culture could lead to friction among teams or limit their effectiveness. For instance, the buyer might impose rules or practices upon the seller’s team that get in the way of their usual modus operandi, therefore limiting their effectiveness (and profitability). Again, neither side is necessarily more right than the other; they just have different ways of doing things that end up clashing down the road.
Financial difficulties: There may be financial difficulties that result from the acquisition. The seller might not yield enough profit to make the transaction worthwhile, for instance, ultimately causing the buyer to divest them or write them down.
Alternatively, the seller might grow too fast. If the buyer doesn’t have enough resources to support that growth — or if they haven’t planned to provide those resources — it can cause tensions to rise and put a stranglehold on the bought company.
Poor integration: Finally, the transaction itself might be sound in terms of value and purpose, but the integration process could still be mishandled. During the due diligence process, the buyer should identify the personnel, processes, products and so forth that allow the seller’s company to operate and make plans to accommodate them.
The Human Element
While it’s true that there could be external circumstances that cause your M&A deal to fail, the most likely point of failure is the human factor.
To counter the impact of human error on your M&A deals, it’s best to implement sound practices that minimize the impact of those errors. Creating a positive corporate environment, implementing (and enforcing) sound policies and processes, and outlining vital steps for due diligence can help accomplish that.
In the end, while there’s a lot that’s outside your control in M&A deals, you can increase the odds of success by focusing on those factors that you can control.