Mergers occur when two companies combine to form one. The new company will have a larger market share, allowing it to achieve economies of scale and become more successful. Additionally, the merger will diminish competition and may result in higher pricing for consumers. An acquisition occurs when one company (the acquirer) acquires a majority ownership in another company (the target), which preserves its name and legal structure. However, according to Harvard Business Review, 70 to 90 percent of mergers and acquisitions are unsuccessful. It’s a staggering amount, and the only thing they have in common is human resources. Most mergers and acquisitions fail because key employees quit, teams don’t get along, or demotivation sets in at the acquired company. In this article, why mergers and acquisitions fail, we take a look at the process involved and the options to you.
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Why do mergers and acquisitions fail?
There are a number of reasons M&As fail and they can include:
- Not having a back-up plan
You may be tempted to accept the first buyer who approaches you with a reasonable offer and a good cultural match when the time comes to sell your business. It would appear that doing so would reduce the duration and difficulty of the sales process. This method can be effective, but it also has the potential to fail. If the buyer feels or knows that he or she is in control, he or she may pay what he or she considers to be a reasonable price rather than what the seller believes to be fair.
Without competition, a vendor loses significant influence and may be forced to make concessions. It is important to keep an open mind to other potential buyers.
- Not understanding the circumstances of both buyer and seller
Typically, there are two separate sorts of sellers: one seeking the most profit for the company, and the other seeking the best buyer for the individuals, families, employees, and community affiliated with the business. Purchasers, on the other hand, are diverse, ranging from strategic purchasers who provide the same services to investment bankers aiming to build and flip an asset, among others.
- Lack of understanding of what makes the business successful
In the thick of all the paperwork and chatter from investment bankers and advisors, it is common to neglect a complete understanding of the answers to the following two questions: What has contributed to the firm’s success, and what unique information do they possess regarding their products, customers, people, distribution, and technology? Frequently, the acquiring organisation generates financial assumptions and predictions to justify the acquisition prior to understanding the associated responses.
This information is only feasible if the acquiring company is prepared to reject the aforementioned misconceptions and adopt the acquired company’s point of view. This occurs regularly in collaborative discovery and planning sessions.
- Managing expectations of the seller
A seasoned M&A consultant can help a seller prepare for the selling process, including what types of proposals to expect. Prior to coming to market, both parties must reach a consensus on the terms of the sale.
- Hidden debt or other financial discrepancies
It is important to be honest with your professional advisor. Depict your company accurately and exhaustively, including its accomplishments and difficulties. The advisor may have immediate suggestions to stabilise the situation until the appropriate buyer is found, or he or she may be able to speed the process to maximise value. Try never to conceal anything.
- Ownership details of the business owner
It is relatively easy to change the name of a company’s owner. You may choose to make your spouse or child the owner for whatever reason. Depending on your business sale plans and your buyer’s regulatory constraints, this may be an important detail to consider.
- Lack of communication
The M&A procedure is extensive and may last many months, a year, or even longer. Communication begins with how prospective clients are introduced to your company. It escalates during the negotiations and culminates at the close. At any of these stages, communication breakdowns might jeopardise a transaction.
Maintaining open and consistent communication throughout the due diligence process facilitates a more beneficial interaction. To ensure that their future priorities are aligned, the buyer and seller should discuss their expectations. This will help prevent future culture shocks.
- Choosing the wrong advisors
Frequently, purchasers are seasoned experts who have undergone the M&A process multiple times. Most likely, they have not, which is why they need a lawyer with experience in this area. Frequently, the language and specifics involved in M&A transactions are sophisticated. So that the seller’s best interests are represented in the transaction, an experienced M&A solicitor will search for common terminology and words. This solicitor will also not waste time on other common buyer protections. Not only are you wasting time, but you may also be annoying and insulting the buyer if your solicitor disagrees about standard contract terms or clauses.
Ensure that you have someone on your side who understands the legal risks and vulnerabilities you will face during the closing phases of a deal. This will ensure that you receive the best level of protection while understanding legal jargon.
Enlisting a knowledgeable counsel to convey the good, the bad, and the ugly to the buyer and seller will aid in preventing unpleasantness and enable both parties to work in cooperation after the closing. From introduction to integration, it is crucial to know that a single individual is directing the entire process.
- Lack of understanding of everyone’s role after the merger
It is an art, not a science, to determine who will do what in a merged organisation. The majority of the collected information about the organization’s employees is a gut feeling based on meetings and interviews. These hunches are always useful, but never sufficient, when it comes to comprehending the valuable asset of people.
- Overpaying
Overpaying for an acquisition is a frequent cause of the failure of an M&A. There is a risk that, if this occurs, the effects will destroy shareholder value. This hinders the M&A from the onset and may lead to additional turmoil or the deal’s eventual failure.
- Lack of defined strategy as to why the merger or acquisition is a good idea in the first place
A successful M&A must be guided by a distinct approach. If the deal lacks a fundamentally sound justification for proceeding, it may ultimately fail. The more straightforward the reason for the transaction, the more likely it is to be successful.
- Be mindful of the wider economy
The timing must be optimal. Mergers and acquisitions may be disadvantaged from the outset by external economic factors influencing the marketplace.
- Management must buy-in to the idea
A lack of management participation can hinder transactions from going smoothly and lead to poor outcomes.
How we can help
We have a proven track record of helping clients deal with the process involved in company mergers and acquisitions. We will guide you diligently and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting. You can read more about the range of corporate services we offer by clicking here: https://blackstonesolicitorsltd.co.uk/corporate-legal-services/
How to Contact Our Corporate Solicitors
It is important for you to be well informed about the issues and possible implications of a business mergers and acquisitions. However, expert legal support is crucial in terms of ensuring your business is set up correctly.
To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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