Merging two businesses, or acquiring a smaller business, often seems like a good idea even when the odds are stacked against success. Research shows that about half of mergers don’t succeed and that 83 percent don’t even boost shareholder returns.
Knowing why mergers and acquisitions fail could help you avoid common pitfalls. Pay attention to these four mistakes while pursuing business deals.
Corporations, like individuals, have unique cultures that can clash during and after a merger. Far too many company leaders think that they can adjust corporate culture on the fly. This approach often leads to confusing policies and disgruntled employees, which in turn affects training costs and production. When cultures clash, businesses fail.
Companies can reduce risk by hiring third-party consultants who can review existing cultures objectively. An agency like Ruota Consulting can take stock of policies and informal characteristics to make sure the newly merged company has a defined culture that makes success more likely.
Moving too Quickly
Mergers and acquisitions take time. Unfortunately, a lot of CEOs and entrepreneurs don’t want to invest the time needed to fully understand the effects of business deals. They may choose to act quickly because they want to save failing companies from financial distress, move on to other projects, or make headlines. When deals move too quickly, it’s nearly impossible for business leaders to make informed decisions.
Treat mergers and acquisitions like romantic relationships. You probably wouldn’t get married until you spent plenty of time getting to know your partner. The same goes for mergers and acquisitions. It’s important to build trust and get to know companies before making long-term commitments. When deals move too quickly, due diligence suffers.
Most companies devote years to building the infrastructure, policies, and clientele needed to earn profits. When merging two businesses, all of these features have to fit together. If there’s a lot of duplication after the merger or acquisition, then the new company will likely waste resources.
Problems that may arise from duplicates include:
- Employee and management positions
A successful merger needs to eliminate extraneous features.
Too Much Debt
Mergers and acquisitions cost a lot of money. In 2014, Facebook spent $22 billion on WhatsApp, a five-year-old company with a strong instant messaging product. Even a company as profitable as Facebook can’t throw around billions of dollars without borrowing money. Taking on the debt needed to buy a successful business can make it nearly impossible for the newly merged company to build profits.
Business leaders often see the advantages of mergers and acquisitions without fully investigating how disadvantages like increased debt will affect the future. Saddled with new debt, many companies end up spending too much money on interest to reinvest in the future.
Planning a merger or acquisition takes a lot of time. It involves copious research and seemingly endless meetings. If you aren’t ready to spend a lot of time mapping business features, then you will need to hire a consulting agency that can do the work for you. Unfortunately, the alternative is usually failure.