M&A Risks and Obstacles

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This article was also written by Pino Bacinello for Corporate Live Wire: http://www.corporatelivewire.com

It is important to understand that sometimes there are acquisitions with a merger while at other times there may be acquisitions without mergers. There are risks and obstacles to both straight out acquisitions, as well as mergers.

An acquisition is typically identified as the transfer of control or ownership of a company’s stock (shares) equity interest or assets. In acquisitions, the most common obstacles are fit and price.

A good acquisition should also be a good fit for the acquiring party. There are many facets to fit and should include but not limited to strategic fit, organizational fit, financial fit, cultural fit, etc. Price is another obstacle that can also be a risk. This is because a buyer may pay too much and / or there may not be adequate growth opportunity to capitalize on the exit.

In a merger, two or more companies consolidate into a single entity and typically with synergistic or strategic objectives such as increasing market share, diversifying products or services, gaining market power or control, increasing or filling plant size or geographic expansion, taking advantage of economies of scale, etc.

Though the obstacles are the same as under a straight acquisition, the most common risk in a merger is ‘cultural differences’. These differences in corporate culture are a common reason for mergers and acquisitions failures. Human resources are often the largest asset of a company and a core strength of an organization. If there is no integration among them, then the merger is destined to fail – this risk can be mitigated by ensuring there is cultural compatibility of the merging companies prior to a transaction. Planned integration of the people and the cultures is critical.

While speaking of human resources, mergers often result in layoffs. These layoffs need to be well assessed to ensure they are not politically motivated but individual employee value is assessed so as not to fire the wrong people. In addition, if employee termination is anticipated, one should also anticipate related costs and / or potential legal litigation aspects and related costs.

Of course, legal risks and issues come into play – especially when the merging companies come from different legal jurisdictions, and where perhaps the legal complexities are not clearly identified or understood. Knowledge of potential litigation of any kind is key.

One obstacle that is often overlooked is the communication between the merging companies. Each side should clearly communicate the general terms of the deal and expectations to the other side. It is important for both sides to share and understand the details pertaining to each other’s market share, product or service details, client base, personnel, etc. in order to avoid discrepancies after the merger that can often lead to discontent.

Inflated values or manipulated numbers is also a risk to be aware of. Metrics are critical and should be looked at critically with great emphasis on the quality of earnings. Overpaying for an acquisition is not uncommon when the acquiring party sees all these synergies that perhaps have not even been clearly verified. Overestimating synergies is an easy thing to do. One needs to take a conservative approach to the assessment of synergies so as not to overvalue the acquisition or fail to achieve the anticipated synergies post-acquisition.

Obtaining clarity on the purpose of an acquisition, or clearly understanding the motives behind an acquisition with great clarity will allow one to go down the right path and in search for the right fit rather than target the wrong company and waste a lot of money or even worse, transact with the wrong company or fit. This may seem obvious however, if it was so obvious, why do we see so many fail? This goes back to what I started with – a good fit is critical in any M&A deal.

It goes without saying the key activity of any merger or acquisition requires thorough and detailed due diligence. Any shortcuts in the due diligence can have significant repercussions post-acquisition. Remember that the reason due diligence is conducted in the first place is not just to confirm that all one has been provided is true and accurate but also to understand exactly what one is buying – opportunity, warts and all – and by the way, if it’s a perfect company, don’t buy it! You will pay too much and there will be no opportunity for growth or improvement, which is where you would otherwise add value.

Last but not least, is to ensure one has the right advisors. The wrong advisors cannot only cost a small fortune, but can also often derail a deal. Engage with people that are experienced in M&A and more importantly, experienced in problem solving, as there are no businesses or companies out there without them. They simply don’t exist. Solution-oriented advisors will pay off big time in finding real and meaningful solutions to any surfaced or discovered issues and where such, can be great opportunities to add value to the acquisition.

M&A provides great opportunities for growth through expansion, diversification, or simply synergizing and capitalizing on economies of scale but it is paramount to assess and mitigate any potential risks. Unforeseen obstacles can substantially increase the real acquisition or merger cost and as such, prudent planning and assessment will allow one to take suitable measures to reduce those risks.