Affinity Reveals Top 4 Reasons Why Mergers and Acquisitions Fail

2024-04-26 10:19:13 Computer

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Shocking but true! Anywhere between 70% and 90% of mergers and acquisitions fail, says a report by Harvard Business Review. If that is correct, then there must be something wrong with how companies are merging with or acquiring other companies.

Of course, there?s no single reason for this high failure rate. It could be poor communication, unrealistic expectations or simply failure to leverage the power of modern tech tools, such as investment banking software and management software for investment bank dealings. This article aims to dig deeper into the issue and discuss some of the most common reasons why mergers and acquisitions fail.

1. Overestimating a company?s market value

The real worth of a business can be contentious. Just because a business looks good on paper doesn?t mean it has a high market value. There are many different ways to calculate the value of a company. For instance, you can use the asset-based method, which works by subtracting a company?s liabilities from its assets. The problem with this method is it doesn?t take into account the perceived value of a business. Another option is the income-based method, which looks at a company?s financial history to predict its future cash flow. You can also valuate a company by stock price or by comparing it to a similar company. Ideally, you should use a combination of these methods to make sure you are not overpaying for the acquisition. Financial losses from overpaying often result in M&A failures in the long run.

2. Not doing enough due diligence

Often, the due diligence process takes weeks, if not months. In an attempt to complete the process faster, some buyers ignore certain steps. As a result, they end up making uninformed decisions. If you are planning to acquire a company, be sure to conduct thorough due diligence before finalizing the deal. At this stage, you should use investment banking software to streamline communication. Advanced M&A management software for investment bank dealings often comes with useful features that help carry out due diligence more easily. For instance, the software enables you to send, receive, store and organize important documents, set permissions for who can view which documents, and secure documents with watermarking and view-only access.

3. Not knowing the motive of the buyer or seller

Just conducting due diligence on the company you are planning to merge with or acquire isn?t enough. In order to fully understand the target company, you should know their real motive for buying or selling the company.

4. Poor integration

Post-merger integration issues are a common reason for M&A failure. If you do not plan your post-close integration from the beginning, you could face multiple challenges. For instance, keeping your employees engaged through a merger or acquisition could be a major challenge. Another issue could be dealing with the senior management. There could also be communication challenges and cultural integration issues. Thankfully, nowadays you can use M&A CRM software to track integration issues and use analytics and reporting to prioritize what needs to be dealt with.