Simply put, mergers and acquisitions are when two or more companies join together to benefit from synergies. The expected benefits are generally to reduce financial risks, diversify the portfolio, increase plant capacity, gain a larger market share, growing the utilization of expertise and R&D. However, joining forces is more complex and comes with serious difficulties. Failed Mergers and Acquisitions Example: "Employee involvement and bottom-up initiatives are part of our culture. Influencers are the ones who have a lot of valuable information and knowledge. They represent the employees of our company with their feedback, and they bring our programs to life with ideas and creativity, enabling us to respond to the real needs of our colleagues." Diána Müller, Head of Organizational Development & Talent Acquisition at Telenor Hungary Mergers and acquisitions are high-stakes undertakings, with a lot of risks involved. What if the company culture doesn't mesh? What if there is too much debt? What if the new company has a toxic work environment? Find out in this article what are the most common reasons for mergers and acquisitions to go wrong, what you can do about them, and how you can make your merger or acquisition successful. In this article, we'll cover the 12 most common reasons mergers and acquisitions fail and what you can do to avoid these pitfalls. Often it might seem reasonable to acquire a company or merge two organizations, but one of the biggest risks that lead to failure is in fact the narrative. You might end up overpaying for a company, and you might misunderstand the entire market. A great example could be when Google bought Motorola in 2012 to make headsets for them. When eventually, Google was not satisfied with the quality of the headset, and Motorola was therefore divested. Avoiding these general failures can easily be done by simply paying more attention to detail rather than focusing on the story behind it. One of the most common reasons why mergers and acquisitions fail is unrealistic expectations. When two companies merge, they often have different ideas about what the new company will be like. This can lead to disagreements and conflict down the road. For example, each organization likely has its own culture, values, and operational setup. If management loses sight of aligning these and finding a clear path to uniting the firms, the merger and acquisition initiative is likely doomed to fail. Managers at both entities need to communicate properly and champion the post-integration milestones step by step. They also need to be attuned to the target company's branding and customer base. The new company risks losing its customers if management is perceived as aloof and impervious to customer needs.
Every day we come across news of a merger or acquisition that has just taken place or is in the process of being finalized. The headlines usually announce some extravagant value that the acquirer has paid for their target company and this is often followed by the potential impact on the employees and customers, who will now be absorbed into the new entity. Companies spend more than $2 trillion on acquisitions every year, yet the M&A failure rate is between 70% and 90%.Why do mergers and acquisitions fail? What are the most common risks?
1. Value Destruction
2. Unrealistic expectations
3. Lack of communication
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4. Overpaying
An analysis looking at 2500 deals between 2013 and 2018 resulted that the larger the transaction, it will most likely fail. Another interesting observation was that mixed deals, including both cash and stock, were also more likely to result in a failed business.
A classic overpaying example happened in 2001, between America Online and Time Warner. Due to the extreme rush of leadership to get into the market of new media, they largely overpaid. Just after a year, this deal resulted in the biggest annual net loss ever reported.
Generally, brokers tend to push to close such great deals “just to get things done”, even if the investors’ deal does not make sense for the organization as a whole. This leads to excessive amounts spent on acquisition while the transaction will not deliver the expected benefits.
5. Poor integration process
When two companies merge, it is important to carefully integrate their operations in order to avoid any disruptions. Unfortunately, many companies do not take the time to properly plan for the integration process. As a result, they end up with two separate companies that are unable to work together effectively. This can lead to a lot of confusion and frustration among employees, customers, and shareholders. If the two companies are not able to effectively communicate and integrate, it can be very difficult to make the merger a success.
Poor planning, culture clash, and unrealistic expectations are just some of the most common reasons. If these issues are not addressed before a merger occurs, it is likely that the merger will not be successful.
“M&A is a mug’s game,” Martin wrote in the June 2016 issue of The Harvard Business Review, “in which typically 70%-90% of acquisitions are abysmal failures.”
Roger L. Martin
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6. Misunderstanding the company
One of the most common reasons that mergers and acquisitions fail is because one company misunderstood the other. They did not take the time to learn about the company's culture, values, and goals. As a result, they were unable to properly integrate the two companies.
When two companies merge, their employees often have different working styles and values. This can lead to conflict and tension between employees, which can ultimately lead to the failure of the merger.
7. Lack of management plan
When a merger occurs, there is often great excitement and optimism among employees. However, if the senior leadership is not excited about the vision or has doubts about its success, then it can be difficult to convince employees that it will work. If the senior leadership does not communicate clearly with employees about what they can expect in terms of benefits and rewards, then it can lead to frustration when those expectations do not materialize.
8. Hidden financial problems
Hidden financial problems can cause mergers and acquisitions to fail. Oftentimes, companies will put on a good front when they are actually struggling financially. This can lead to serious problems down the road when the true financial state of the company is revealed.
9. Limited Owner Involvement
In most cases, owners of large corporations rather appoint one person who is responsible for conducting the entire M&A process. These advisors are then left with everything to deal with and their role is limited until the transaction is completed. Instead, owners should be actively involved in the entire process, and the advisors shall fill the role of an associate rather than the head of the entire deal. If the owner is involved, he will have a better overview and learning experience and it will also ensure more transparency towards employees as well as decrease the uncertainty throughout the organization.
10. Cultural Integration Issues
Cultural clashes between the two entities often mean that employees do not execute post-integration plans. When two companies merge, they often have different cultures and values. This can lead to tension and conflict between employees.
Finally, another common reason why mergers and acquisitions fail is because of cultural differences between the two companies. If the cultures of the two companies are not compatible, it can be very difficult to make the merger work. Cultural differences can lead to conflicts and misunderstandings between employees, which can make it hard to get work done.
11. High Recovery Costs
Mergers and acquisitions can often be expensive and time-consuming. One of the main reasons why they fail is because of the high recovery costs.
It can often be difficult to integrate two companies successfully. This can lead to high recovery costs, as the new company may have to invest in new systems and processes. In addition, there may be redundancies within the new company, which can also lead to high costs.
12. Overlooking cultural and operational differences
Understanding the cultural and operational differences between all companies
involved is essential during the integration process. There are some crucial intervention points:
- Appropriate organizational structure design;
- Shorter transition processes;
- Reduced integration costs;
- Less key employees leaving.
In a nutshell
Overall, there are many reasons why mergers and acquisitions fail. Value destruction, poor communication and integration, and cultural differences are some of the most common reasons. If these issues are not addressed, it can be very difficult to make a merger or acquisition a success.
Lastly, another common reason for failure is that the two companies simply are not compatible. This can be because of different business models, different strategies, or even different values. If the two companies are not compatible, it can be very difficult to make the merger or acquisition work long-term.
How ONA can help you make your post-merger integration successful?
Organizational network analysis (ONA) is a tool that can be used to understand the relationships between people within an organization. ONA can help identify patterns of behavior and communication, as well as potential areas of conflict. It can also be used to assess the health of an organization's social network. It is a tool used to map out the relationships between individuals and groups within an organization. Furthermore, ONA can be used to improve communication and collaboration within an organization.
This information can be used to identify areas of potential improvement, optimize team performance, and foster better communication. ONA can be used to identify patterns and trends within the organization, and to understand how information flows through the company. By understanding these dynamics, businesses can make better decisions about how to allocate resources and improve efficiency.
OrgMapper provides pre- and post-merger insights that can be used and built upon to prevent culture clashes, management disputes, loss of productivity and key talent, and inefficient communication, inability to manage/implement change, inability to sustain financial performance.
OrgMapper supports mergers and Acquisitions by:
- Mapping Key Employees
OrgMapper identifies key opinion leaders (KOLs) who are well-suited to accelerate the transformation process and thus should be retained. Key employees might have special expertise and knowledge that are considered a key asset; capabilities, such as influencing power, or strong informal networks that are essential to the success of the integration. Foresight scenarios and their impacts can be modeled by repositioning key employees based on the findings of the analysis.
- Mapping Cultural Differences
OrgMapper identifies key cultural aspects focusing on similarities and differences between the companies. Understanding cultural differences can result in the planning and execution of an accurate change management program; shortening the adaptation process and period; easing the cultural transformation and avoiding major cultural clashes leading to significant performance decrease, and the loss of key employees.
- Mapping Integration Progress
OrgMapper provides insights into an organizational design by discovering ideal workflow, decision making, knowledge sharing patterns, formal and informal employee relations, team cooperation set-ups, and communication processes.
OrgMapper enables the assessment of current networks, the foresight of optional scenarios, and the monitoring of integration progress.
