Article NO.

14: The Top

Reasons Why M&A Deals Fail
Summarized by: Zubair Ahmed Memon

Link: https://www.investopedia.com/articles/investing/111014/top-reasons-why-ma-deals-fail.asp

Author: Shobhit Seth (Indian)

Submitted To:
Sir Adnan Kehar

OCTOBER 13, 2018

Consider, if you buy a used car – you can have few test rides, examine the the exteriors and interiors
carefully, and take expert opinion from trained mechanics to assess the car. Despite all measures you
take to assess the car, the reality of the used car, whether it is a good buy or not, it will be evident only
after you purchase it and ride it for some period.

Mergers and Acquisitions deals also face the same challenge. You may assess existing business based
on financial reports, assumptions of potential fit and advisory assistance from M&A advisors. But the
reality will become evident only when the deal is done and you have to run the business forward.

The broad purpose of any M&A deal is:

 Expansion/Growth by acquiring new business, products, markets and customers

 Increasing profitability based on strategic potential of the deal

Losing your focus on the desired objectives, failure to devise a concrete plan with suitable control, and
lack of establishing necessary integration processes can lead to failure of any M&A deal.

Reasons why deals fail

Theoretical valuation vs. the practical proposition of future benefits: The financial numbers and
assets that seem good on paper may not be the real winning factors once the deal is done. The failure of
Bank of America’s acquisition of Countrywide is a vivid example.

Lack of clarity and execution of the integration process: Major challenge for any M&A deal is the
post-merger integration. A careful appraisal can help identify key employees, potential projects and
products, sensitive processes and matters, etc. Using these identified critical areas, efficient processes
for clear integration should be designed, aided by consulting, automation or even outsourcing options
being fully assessed.

Cultural integration issues: This factor is quite evident in global M&A deals, and a proper strategy
should be made either to go for forceful integration ignoring cultural differences, or allowing the
regional/local businesses to run their respective units, with clear targets and strategy on profit making.

Actual cost of a difficult integration & high cost of recovery: Keeping in view the available resources
and resources required for future prospects and need, the strategies that help surpass the potential costs
and challenges of integration should be made. Investments today in a difficult integration spread over
the next few years may be difficult to recover in the long run.

Negotiations errors: Cases of overpaying for an acquisition (with high advisory fee) are also
uncontrolled in executing M&A deals, leading to financial losses and hence failures.

External factors and changes to the business environment: The Bank of America/Countrywide
failure was also due to the overall financial sector collapsing, with mortgage companies being the worst
hit. External factors may not be fully controllable, and the best approach in such situations is to look
forward and limit further losses, which may include completely shutting down the business or taking
similar hard decisions.

The backup plan: With more than 80% of M&A deals result in failure, it is always better to keep a
backup plan to disengage in a timely manner (with/without a loss), to avoid further losses.