Common Challenges in Mergers & Acquisition Deals

During the rapid-paced and competitive business era of today, mergers & acquisition (M&A) transactions are becoming a more common strategic tool of necessity for businesses seeking to grow, gain market share, or become more business effective. Ranging from acquiring a smaller competitor to drive market share to merging with a company to extend products, M&A can be a turnaround strategy.

But even with the potential returns, M&A transactions are also inherently complicated and fraught with danger. Most deals fall short because errors are committed before, during, or following the deal. In order to transition and succeed in the long run, you need to know where the most usual traps occur in mergers & acquisition transactions.

Following, we present the most frequent business errors when it comes to M&A and how to avoid them.

1. Cultural Misalignment

Most, but most often failed, test of deal-making in mergers & acquisitions is cultural fit. Two organizations can be perfect merge on paper—same products or services, same customers, or shared objectives—but without aligned corporate cultures, it can result in business disruption, intracompany conflict, and top talent flight.

For example, if an old-line company buys a start-up that is high-tech, then communication clash, decision-making, and work style clash can bring tension and confusion.

How to Fix It:

• Perform a cultural due diligence analysis initially.
• Develop a strong integration plan that honors both cultures.
• Foster open communication and employee receptivity.
• Train leaders in successfully managing cultural change.

2. Not Enough Due Diligence

It is the backing of a successful mergers & acquisitions deal. Companies may end up purchasing upfront liabilities in the form of legal conflicts, accounting problems, or corporate inefficiencies without proper review. Proper due diligence leads to buyer’s remorse and deal failure in some cases.

How to Fix It:

• Put together a due diligence team of finance, legal, HR, and IT experts.
• Walk through every agreement, tax returns, intellectual property, compliance filings, etc.
• Task not to rush—make sure all the significant questions have been answered.
• Use data rooms and computer programs in tracking and facilitating the process efficiently.

3. Overvaluation or Undervaluation

Valuing the company at the right price will be the most difficult aspect of the M&A deal. Sellers attempt to push the price higher based on promise, and buyers will wait for holding it at actual outcomes and risk. The expectation gap will result in prolonged negotiations or deal failure.

Solution:

• Use third-party valuation experts to bring an objective view.
• Utilize several methods of valuation (DCF, comparables, precedent transactions) to corroborate.
• Employ performance-based earnouts to structure deals to minimize valuation risk.

4. Regulatory and Legal Issues

M&A transactions can be reviewed by regulatory bodies based on the size, type, and geographical scope of the merging parties. Antitrust regulation, cross-border investment, tax policy, and regulation of an industry can slow down or deter transactions.

How to Deal With It:

• Designate experienced legal advisers as well as regulatory compliance specialists.
• Negotiate regulators in advance and openly disclose the transaction structure and purpose.
• Factor in timing and regulatory clearance expense into your deal timeline.

5. Technology and Systems Integration

Technology is either a gargantuan enabler or a massive barrier to M&A. Integrating two disparate IT platforms, systems, and data architectures is a monumental technical challenge. Poor integration can lead to business-as-usual disruption, loss of data, and cybersecurity exposure.

How to Cure It:

• Conduct an IT audit as part of due diligence.
• Develop an end-to-end technology integration approach.
• Prioritize cybersecurity and data protection regulation compliance.
• Hire external IT experts to make it simpler.

6. Retention of Key Talent

Employees are a company’s most valuable asset. But M&A creates fear and uncertainty for employees. Businesses can lose their best talent—especially leadership and technical employees of greatest value—without having a communications strategy.

How to Fix It:

• Early recognition of critical staff and the offering of extension of retention incentives or career growth opportunities.
• Maintain open communication regarding organizational change and expectations.
• Make them belong and enable the employees to vent.

7. Poor Post-Merger Integration (PMI)

Closing the deal is merely the beginning. Poor post-merger integration is one of the primary reasons M&A transactions do not deliver. Organizations are overly optimistic about the job of integrating operations, systems, personnel, and cultures.

Improving It:

• Start incorporating planning into due diligence—although not in the deal close.
• Set clear goals, timelines, and accountability structures for integration projects.
• Set cross-functional teams to manage integration across departments.
• Track milestones of integration and revise plans as discovered.

8. Communication Breakdown

Poor communication—or conflicting messages—may lead to confusion among employee, customer, partner, and other stakeholders. It can result in undermined trust, damage to reputation, and inefficiency in operations.

How to Fix It:

• Develop a communications plan with emphasis on several stakeholders (employees, investors, customers).
• Use internal communications to keep the teams educated and in sync.
• Offer open communication regarding change, timeline, and direction of strategy.

Conclusion

Mergers & acquisitions transactions can release marvelous value, but with a unique set of challenges requiring strategic planning, effective communication, and expert execution. Starting from culture clashes to integration problems, businesses must get a head start on the risks and frame strategies for handling them.

The successful mergers & acquisitions are those that turn the acquisition into greater than a dollars-and-cents deal. They see it as long-term restructuring, i.e., people, systems, and strategy. Avoid and move away from these traps typical of corporations, and they can have a smoother ride and derive the greatest advantage from their mergers & acquisition plan.