7 Common Risks Involved In Mergers And Acquisitions

There are good merger and acquisition (M&A) chances for businesses to increase growth, expand market presence, and impact supply chains. While M&A deals offer such advantages, they also come with significant risks.

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This blog post contains 7 potential risks that impact the success of an M&A transaction or hinder a company from getting anticipated advantages.

Overpaying for the Target Company

As per Forbes, paying too much for a company can harm shareholder value. Forbes and other studies show that most mergers and acquisitions do not benefit shareholders, with a failure rate of 70-90%.

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This highlights the main issue of relying on simplistic valuation methods such as revenue multiples, which may overlook key variables like future cash flows and market conditions.

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For example, Microsoft spent over $8 billion on its unsuccessful Nokia venture, which involved restructuring expenses and severance payouts for a large number of employees. Initially acquiring Nokia's phone business for $7.2 billion, Microsoft brought on 25,000 Nokia employees. However, ongoing layoffs in recent years have led to the closure of Microsoft's mobile division.

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How to Avoid Overpaying for the Target Company?

Before finalizing any deal, it is important to consider your company's overall strategy and goals. This will help you avoid paying more than necessary. For example, you can ask key questions like:

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• What is your reason for pursuing this deal?  
• What are your primary objectives?  
• Have you considered alternative methods, besides acquisitions, to achieve these goals?

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It is recommended to create a thorough valuation report for your company, whether internally or by hiring an external party to determine a fair and accurate price for the target. Gathering key financial information like tax returns, financial statements from the past few years, details about the target's organizational structure and staff size, and any shareholder agreements is also important.

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It is advised to view the suggested price as a maximum rather than a baseline. It helps to make sound decisions and pay a fair amount.

Overestimating Synergies

Yes, synergies are real but they are not always the magic solution that some managers of acquiring companies think they are. Synergies are often cited as the main reason for an acquisition, but they should be viewed as just one of many important factors.

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These managers recognize the benefits they can achieve if the deal is finalized, such as scale, scope, best practices, shared distribution, intellectual property, and workforce efficiency. However, spreading efforts too thin across all areas may result in missing out on cost-saving synergies.

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How to Avoid Overestimating Synergies?

Utilize M&A project management platforms and valuation spreadsheets to calculate synergies. To prevent overestimating synergies, consider conservative projections based on industry benchmarks and stress test the assumptions across various scenarios.

Weak Due Diligence Process

Inadequate due diligence practices contradict the purpose and meaning of due diligence. Despite this, many deals suffer due to teams' lack of readiness for legal due diligence and insufficient experience and expertise in conducting due diligence. Poor preparation and execution of due diligence can lead to undervaluation, higher risks, and misguided decision-making.

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How to Avoid Weak Due Diligence Practices?

It is important to have a diverse team with expertise in business, legal, and financial matters. Each diligence team should be able to understand the specific deal and industry of the company.

While hiring an expert may seem expensive initially, it often results in creating value. For instance, a company's internal legal team may lack the necessary expertise in intellectual property management to accurately assess the value of a target's IP assets.

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The team responsible for due diligence plays a crucial role before and during the process. Before starting due diligence, the team should create a comprehensive list of requests, including financial reports, legal contracts, regulatory compliance records, and intellectual property details.

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Integration Shortfalls

Mergers and acquisitions experts agree that post-merger integration poses the most challenges in any deal. This phase includes various tasks such as internal management assessments and merging sales teams. These challenges carry notable risks, including potential employee dissatisfaction, failure to achieve synergies, and loss of value.

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Each integration process differs greatly in scale. Additionally, cultural integration can be challenging to pinpoint initially.

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How to Avoid Common M&A Integration Shortfalls?

To enhance integration practices, it is recommended to involve due diligence team members in the integration team. This helps maintain consistency and streamlines information flow. It is beneficial to have individuals with a good understanding and experience in value creation as part of your integration team.

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A competent and experienced integration team from the outset of the deal allows for thorough integration planning throughout the due diligence process. This enables you to have a deeper understanding of the target company as more information is revealed.

Little Attention to Culture and Change Management

Not considering culture can have serious consequences for a company looking to acquire another. The same applies to insufficient change management practices. It is common for valuable employees to depart during mergers and acquisitions, with recruiters ready to poach those dissatisfied, anxious, or uncertain about the new arrangement.

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Company morale is strongly influenced by culture and change management, and a positive and supportive atmosphere can significantly contribute to the achievement of company objectives and strategies.

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How to Avoid Cultural Effects of M&A?

Early in the integration planning process, the buyer should start gathering information about the target company's culture. This can be done by analyzing how the target discusses management styles and workflows or having one-on-one conversations. Ideally, the buyer should have a change management expert or team to gather this intelligence.

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As the deal moves forward and more culture-related information is gathered, the change management team will analyze the distinctions between the acquiring and selling entities that may hinder or hinder the deal's success.

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Threats to Security

Information is crucial during negotiations, however, it is not only beneficial to you but also to hackers and thieves. Security threats impact both buyers and sellers, affecting the value of the deal.

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How to Avoid Security Threats

One method to prevent security risks while sharing and reviewing private data is using virtual data rooms. Additionally, choose a virtual data room that:

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• Is ISO compliant.
• Includes digital watermarking.
• Utilizes strong encryption methods.
• Offers multiple document permission and restriction settings.  
• Requires two-factor authentication.

Unforeseen Market Disruptions

There are unpredictable risks, such as natural disasters, that are beyond our control. These unforeseen circumstances are likely to impact the market and economy in the long term.

Ongoing learning through mergers and acquisitions research, career growth, and conversations with fellow professionals are important to handle unexpected market changes effectively. 

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By doing so, you can potentially minimize any negative effects on your business. Also, studying the effects of past market shifts (such as the 2008 economic crisis) can offer useful lessons for future challenges. While not a cure-all, gaining knowledge and continuously improving professionally can help you make informed decisions in difficult situations.

Conclusion

ioSENTRIX helps you effectively handle mergers and acquisitions (M&A). What is the main challenge you are facing at the moment?

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• Assessing potential risks across various systems and business units?
• Detecting and resolving risks in real-time?

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Address all your challenges effortlessly with ioSENTRIX, a comprehensive platform designed to streamline your risk management process. Contact us today to discover how we can serve you.

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