Done deal? Think again - When M&A goes wrong

Linda Le, thedocyard's market analyst

When mergers go well, they can enable a company to enlarge its market share, achieve economies of scale, reduce its financial risk, and diversify its product and service offerings. Author and motivational speaker, Simon Sinek, famously compared mergers to marriages. Like any marriage, there are ups and downs and sometimes, things go wrong and there are a number of reasons why this might be the case. In today’s blog post, we explore the top 5 reasons why M&A transactions fail.

1. Valuation Mistakes

Valuations are often cited as the main reason why deals fail to close. An example of this is Kraft Heinz’s attempted acquisition of Unilever plc in 2017. As part of this deal, Kraft offered an 18% premium to Unilever’s closing share price the day before the announcement. However, the deal eventually failed to close because Unilever executives felt that the deal undervalued the company. This, alongside job-cut implications and issues around regulator approval, ultimately led to the bid being dropped on February 19, 2017.

Even after the transaction has closed, valuation issues may arise. One of the most famous cases of valuation mistakes is Hewlett Packard’s 2011 acquisition of British software company, Autonomy, for $11.7 billion. By 2012, HP had taken a massive $18 billion impairment to goodwill charge after uncovering serious accounting discrepancies. Often cited as a case study in buyer’s remorse, HP have since alleged that Autonomy inflated the value of the firm before selling it, alleging that their accounts were inflated through a series of fraudulent transactions.

2. Time is of the essence

In M&A deals, time is the greatest enemy. As the deal process drags on, momentum and interest on both the buyer and seller side can be easily lost. Lengthy due diligence processes in particular can drag out the deals process.

If deals stall, it becomes increasingly likely that a deal will not happen or unfavourable terms will be reached. It is in both the buyer and seller’s best interests to get things done in a timely manner, responding to due diligence requests, turning around document mark-ups, making decisions quickly on negotiating issues, and the like.

3. Material changes

Material changes in the business’ operations happen all the time and this is sometimes beyond the control of either the buyer or the seller. These changes may affect the buyer’s appetite for M&A. Examples of material changes might be recessions, the loss of key personnel, or even COVID-19. There are reports coming out of America that more than $100 billion of M&A deals have been terminated amid the ‘new world order’ of COVID-19.

Sometimes, M&A agreements will expressly include a material adverse change clause that allows one party, usually the buyer, to pull out of the acquisition prior to completion in the event of a material adverse change that has occurred. The inclusion of this clause will usually shift risk onto the seller and leave it exposed to events outside its control.

Even where there is no material adverse change clause, when material changes happen, the onus is on the seller to promptly and fully disclose it to the potential buyer; this is because these disclosures are important for maintaining the buyer’s trust in the seller. However, even then, these material changes can make a deal less palatable and ultimately stop a deal from closing.

4. Failing to communicate the ‘fit’

The seller needs to effectively communicate the company’s competitive advantages, its vision and growth prospects, and strategic fit with the buyer. Sellers should also communicate the strength of their management team and their commitment to the new merged entity, and their desire to facilitate the business’ growth post-transaction.

In doing so, both sellers and buyers need to be on the same page about how the new merged entity will work as one. An example of when this wasn’t the case was with respect to Google’s acquisition of Motorola Mobility; Motorola consistently failed to innovate after being acquired and also released a number of handsets of questionable quality and performance, while also reneging on its promise to upgrade an entire generation of handsets. Separate to this, Google also continued to release its own branded smartphones which directly competed with Motorola Mobility.

While Google did eventually make an attempt to properly integrate Motorola into the company, their flagship handset performed poorly, and Google promptly divested Motorola less than two years after acquiring it.

5. Cultural Integration

When two companies become one, that is not the end of the story, it is merely the beginning of a new chapter and the hardest part is yet to come: the process of actually integrating the two into one.

In this, culture has emerged as one of the biggest obstacles to effective mergers, responsible for about 30% of failed integrations. This is because a company’s culture is often deeply embedded, feels ‘right’ to people, and something that personnel are usually particularly comfortable with, even if they aren’t actually cognisant of the fact that there is culture to begin with. Workplace cultures influence how people behave in the workplace, how they make decisions, how they work together, and what “success” looks like. Where the two companies originally had very different cultures, it may be difficult to reconcile the two.

For example, in 2017, Amazon acquired Whole Foods in a deal that the Whole Foods CEO John Mackey described as “love at first sight”. It was anticipated that the deal would allow Amazon to grow into the groceries sector and collect significant shopper data.

Unfortunately, the romance was somewhat by stories of Whole Foods employees crying over new performance-driven working conditions imposed by Amazon, angry customers, and empty shelves. This may be attributed to the culture clash that resulted from the merger.

While Amazon and Whole Foods were independently incredibly successful companies, they have different working styles; where Whole Foods is more decentralised and takes great pride in its personal and human touch, Amazon is more data-driven, focussed on doing things quickly, cheaply, and efficiently. Both of these models have strengths and weaknesses, and neither one is necessarily more “correct” than the other. However, they are very different and attempts to merge these companies and their very different mindsets led to “culture shock”.

It is important that cultural integration is well-managed and that a cohesive culture is created within the new, merged entity. It is important for management to focus on building a cohesive culture and managing culture shocks to ensure that the culture does not undermine the ability of the merged entity to meet its goals and that key personnel remain committed and engaged with the new company.

To this end, like a marriage gone wrong, the slightest lack of trust, incompatibility and inability to adjust may lead to the failure of a merger. After all, in the words of Abraham Lincoln himself: a house divided against itself simply cannot stand.

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