This article is in continuation of my previous article “Merger and Amalgamation in India” posted on 17th October 2013 which describes the overview of merger and amalgamation in light of various provisions under various Acts. However, in this article, author provides the insight of major reasons of failure of M&A. For any queries, author can be reached at [email protected]
Merger and acquisitions (‘M&A’) are the key forms of corporate restructuring. M&A activities are increasing over period. Achieving the economies of scale, broadening geographic market coverage, and more effectively competing have helped to create a flurry of acquisitions in the marketplace. But no merger is perfect. There are many risk and challenges associated with any deal. Inaccurate estimation of even of one driver could result in failure of M&A. There are some important causes of failure of merger and acquisitions:
Inadequate due diligence:
Due diligence helps in detecting financial and business risks that the acquirer inherits from the target company, hence, is very crucial component in M&A process. Inaccurate estimation of related risk can result in failure of the merger.
The process of M&A involves valuation of Target Company and paying a price for taking over the assets of the company. Often, prices paid exceed what it should be. Expectation of high profitability due to overpayment is not always possible. Excessive goodwill as a result of overpaying needs to be written down which reduces the profitability of the firm.
Sometimes, failure to properly assess the strategic benefits also cause the M&A failure, or in other words, overestimation of synergies can lead to failure of merger. Synergies is one of the important instrument of M&A process and the same is created through increasing revenues, reducing cost, reduction in net working capital etc.
The acquirer may decide to pay the target company its major portion in cash, and for this, may borrow heavily from market. This leads to high leverage, increased interest burden, which in turn consumes the major portion of earnings and overall defeat the purpose of M&A.
Corporate Cultural Differences & Integration Issues:
Cultural differences if not resolved can affect communications, decision-making, productivity and employee turnover at all levels of organization. If the two workforces fail to unite behind the strategic goals underlying consolidation, even the best financial deals and most rigorous legal contracts fails to guarantee success. Flexible and adaptable business cultures and work ethics are required. Inefficiencies and administrative problems are very common occurrence in merger which often nullifies the advantages of the merger.