Minnesota Lawyer
By Nick Stern
When mergers and acquisitions work out as planned, the result can be a thing of beauty. Synergies are realized, efficiencies reaped, market share expanded and employee teams melded into precisely humming clockwork.
But there are times when M&A’s do not go according to plan. Examples of failed mergers abound.
In 2015, Microsoft wrote off 96 percent of the value of Nokia’s handset business it purchased for $7.9 billion the prior year. Sprint is valued at about $5 billion less than it spent for Nextel; Time Warner spent $114 billion on AOL, and TWX is now worth about $77 billion.
The Harvard Business Review estimates 70 percent to 90 percent of acquisitions are considered failures. While most publicly traded firms that responded to a McKinsey survey said they believe deals generally add shareholder value, only 8 percent thought the acquisition process added value, or that their efforts were completed on time and fully met their business objectives.
Still, the search for M&A deals continues apace, bolstered by heightened expectations of a favorable tax environment and regulatory relief.
According to KPMG LLP’s 2017 Pulse survey, 84 percent of respondents said they expected to initiate an M&A deal this year, compared to 83 percent who said they had in 2016. And 75 percent said they planned on carrying out multiple transactions in 2017.
So, what could go wrong?
Plenty, it turns out.
Time pressures
There are times when deals are quickly assembled. Perhaps too quickly. Buyers these days are adept at assembling financing, said attorney Michael Marhofer, partner and co-chair, corporate and securities practice group, at Benesch in Cleveland. Sellers, too, on the whole are very sophisticated and often hire lawyers and investment bankers to help carry out transactions.
“In the current environment, the speed of things is crazy,” he said. Buyers are stretching to meet more compressed timelines in which to conduct complex due diligence. Meanwhile, they’re facing high prices for the right firms in competitive sectors like tech or health care.
A mistake in the overall evaluation of an acquisition’s value early on, Marhofer said, can lead to a transaction with a bad outcome.
After the deal is done, the acquisition may not deliver on its promises because important business relationships aren’t maintained, noted Stuart Smith III, managing director at M&T’s Investment Banking Group. Perhaps relationships with suppliers change for the worse, or the makeup of customer-facing personnel shifts in a way that upsets the positive dynamics of the purchased company.
If the deal has closed and things start to go south, it could be the result of buyers who’ve lost their focus or failed to properly integrate functions like IT, HR or finance, said Kevin Martin, partner at Deal Advisory at KPMG LLP. He’s seen recent mergers that sought to integrate about 100 functions in six months to a year.
“The organization needs to understand the amount of work needed,” he said.
Unrealistic expectations
Smith cautioned that companies should be careful about overly exuberant projected synergies from a merger. Firms can get locked into a financial model that predicts enhanced purchasing power or larger market share, but it might not work out as planned.
“We say not to get too focused on synergies,” Smith said. “They’re harder to materialize than many people think.”
An overall lack of management bandwidth also can scuttle overly ambitious growth goals. “
This can really play a big role in the success of the business,” Marhofer said, and can especially become an issue in complicated add-on acquisitions where a company buys one business with the intent to buy more in the sector. Key managers can become stretched as they accrue duties, like helping find and successfully integrate new companies.
Communication is fundamental, and poor communication can be deadly. Successful acquisitions Marhofer has seen typically involve CEOs on the ground meeting with new employees, discussing why the deal was done and what the next steps are, explaining benefit plans and opportunities for new growth. “Usually, there is a nice story to tell — tell it,” he said.
Culture clash
The cultural bit shouldn’t be ignored, Martin said. Firms have to know what they’re buying and how it can be successfully integrated in terms of interests, benefit plans and work environment. He’s seen mergers that founder from a culture clash, citing problems that arose between a laid-back West Coast firm and suit-wearing East Coast investors as a recent example.
About two years after PwC purchased Booz & Co. in 2014, a large portion of the partners left the firm, in part due to cultural differences and an inadequate retention plan, he noted.
“People are what drive businesses,” Smith said. Lately, he’s seeing more buyers bring in industrial psychologists to advise on acquisitions to help determine the culture of a company and how communications flow, for instance. “You want to know as much as you can about how the business operates on a day-to-day basis.”
Also, companies simply need to give time for the acquisition strategy to take root. Sometimes buyers can become impatient to, for example, realize the benefits from implementing a new technology that may need more time to take hold than what is baked into the financial projections, Smith said.
