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Oct 23 2013

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Top 11 Reasons Why Mergers and Acquisitions Fail

Though Mergers and Acquisitions are done to achieve some benefits like synergistic gains that results from more proficient management, economies of scale, more profitable use of assets, utilization of market power, the use of complementary resources and many more, it often fails. Both at the implementation stage and negotiation stage M&A may fail because of the poor leadership structure. The cultural difference between two firm, the management composition, and other sensitive issues may fuels to the failure of M&As.

No concrete answer and single factor as to why M&A fail to engender value for acquiring firm shareholders cannot be given because mergers fail for a bundle of reasons. The possible reasons for collapse of M&A are described below as follows:

  1. Lack of post-merger effort: If a firm has intermediate expectations, it might optimally consent on merging and refrain from exercising any post-merger effort. Though effort does not ensure the possibility of achieving synergistic gains, merging might still be beneficial. But if the acquiring firm hopes to free-ride on the efforts of target and predicts to earn non-synergistic gains, it won’t compensate the cost of merging. If both parties resist from exerting any post-merger effort, that M&A is said to be failed.
  2. Size of the firms: The size of the acquiring and acquired firms is an important factor for failure of M&As. In this case acquisition indigestion occurs. The acquisition indigestion may take place when a small firm buy outs a big firm or a giant firm acquires a small firms but does not pay  much attention it demands.
  3. Overstated information: Because of information asymmetry, failure may occur even though both entity’s management takes appropriate merger decisions. Failure couldn’t also be stopped by post-merger communication. Because regardless of its effort decision, each entity has enticements to exaggerate its own information. Rather it always wants the others to exercise efforts. Under this circumstances, credible communication can not be build up and results in failure of M&A.
  4. Diversification: it is only a few who have the ability to successfully manage the diversified businesses. Many research found that acquisitions of related industries constantly do better than acquisitions into unrelated. Unrelated diversification has been allied with lower financial performance, lesser capital productivity and a higher degree of volatility in performance for a variety of reasons comprising a lack of industry or geographic knowledge, a lack of focus as well as apparent inability to obtain meaningful synergies. Unrelated acquisitions which may come into sight to be very promising may turn out to be a big frustration in reality.
  5. Poor organization fit: Organizational fit can be explained as the adjusting features between administrative practices, cultural practices and personnel traits of the acquiree and acquirer. It persuades the ease with which two entities can be integrated during execution. So the organizations fit should be fine-tuned among the parties to gain a synergistic effect. Otherwise these cultural differences may act as a catalyst to failure.
  6. No common vision: Commonly there is an absence of the common vision of the merged entities. That is what the merged company will put for, how the entity will operate, what it will follow, and what will be the difference compared to other rival firms toady, there is no point of exclamation on the horizon (The Telegraph, 2013). In this circumstance merged firms become helpless and fail to generate economies of scale.
  7. 2+2>4 attitude: The merger between A and B company tries to get extra benefits which are called synergistic effect, but sometimes fail. Because instead of getting attracted consumers of A and B become confused and often switch to a new company, abandoning the merged entities in the stagger. Thus the both organizations lose its existing and potential customers.
  8. Failure to take responsibility: There is an old adage, “ Everyone’s responsibility means no one’s responsibility”. This proverb sometimes becomes a cruel true for some M&As. Everyone in an organization wants authority to command over others but not to take responsibility. But it is the duty of each management personnel to create a safe, open environment, and help others do the same. It also requires concentrating learning lessons, and problem solving, not blaming others.
  9. Lack of courage: Courage is needed to make some extra-ordinary decisions. Because now firms is not a single entity, there are other shareholders associated with this new company. So before taking any haphazard decision, management has to think thoroughly. So delaying some of the complex decisions that are required to incorporate two organizations can only effect in a disappointing result. Not all the decisions will please everyone, but it has the benefits of lucidity and honesty, and allows the people who do not uncover the journey and goal appealing to step off before the train leaves the platform (The telegraph, 2013).
  10. Ignorance: Ignorance indicates the inability to interchange commercially sensitive information by the parties to an M&A. It is the event prior to being under common possession, where there is enough significantly important and legally allowable preparation work to keep an integration squad busy for a number of months before the final day. Most of the chief executives don’t have idea about this matter and they waste the time which could be put to good utilize while they wait for approval from the regulatory authorities. So ignorance can put forth to the failure of the aforementioned M&As.
  11. Paying Too Much: Most of the times in a competitive bidding condition, a firm may be inclined to pay more. Often highest bidder is the individual who overestimates the value because of his ignorance. Thus when the bidder fails to achieve the expected synergies necessary to compensate the price, the M&As fail. The more one pays for an entity, the harder it will be for one to make it worthwhile for one’s stakeholders. Over payment however do not make sense and leads to failure of the said deals.

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  • Mea Poethree

    Poor organization fit: Otherwise these cultural differences may act as a catalyst to failure.

    Cultural differences should not be a cause of mergers and acquisitions of a corporation. But sometimes it is often the case, the management should be able to anticipate this sooner.

    Business Strategy