It is little secret among decision-makers at corporations and private equity firms that M&A deals don’t always succeed after closing. Given the complexity of combining two independent entities, overcoming cultural as well as language barriers, synthesizing redundant systems and more, the chance of a deal failing or leading to a negative outcome can be considerable.
Toppan Vintage, a trusted financial printing and communications company, in partnership with Mergermarket, is pleased to present the newest edition of M&A Pulse newsletter. This newsletter features responses from US-based senior corporate executives who shared their insights on failed deals.
Lesson #2: Anticipate the unexpected. Leading deal experts weigh in...
Deals fail for different kinds of reasons. Some are under the control of decision-makers. Others can only be anticipated as possibilities, planned for — and then mitigated after they arise.
When asked to pick the single most-important factor underlying their own failed deals, surveytakers pointed to a poor economic climate. About a quarter (24%) selected the economy as the number-one reason deals failed in their experience,
above any other factor.
To be sure, the tumultuous global economic environment of the last decade has proven to be stormy weather for dealmaking, after the financial crisis a decade ago was followed by a historically sluggish recovery.
One crisis-era bet that quickly soured was KKR’s US$26.4bn buyout of payment processing company First Data. The private equity firm installed a new CEO in 2013 in an attempt to turn around the acquisition, which struggled with debt, but in mid-2014 it still held around US$23bn in long-term obligations. It went public in 2015, with KKR continuing to own a majority stake. Two years later, in September 2017, KKR announced it would finally sell shares of the company in a secondary offering – making the stock price plummet.
In some ways, failed bets like this are unavoidable. (Indeed, 80% of our survey respondents said there were no warning signs in the failed deals they participated in – see Lesson #4 for details.) However, the wagers emphasize the importance of timing the market for acquisitions, to the extent possible, and of avoiding overpaying for assets when valuations rise. Targeting assets that provide a degree of countercyclical protection can be a useful strategy as well.
Changes in the economic or political climate may be impossible to control. But other issues that also scuppered deals could have been more readily addressed through stronger management practices or better advance knowledge of the market. A fifth (20%) of respondents said missteps during postmerger integration were most to blame for recent failures. Slightly fewer (18%) said legal or regulatory issues often caused deals to end badly.
The fourth-most-cited response was that competitors outperformed the acquired company – a clear case in which a more in-depth study of the
landscape could have benefited the buyer.
“We acquired a strong local brand, and then post-deal, the economy declined and the market stopped responding,” said a managing partner at an Italian private equity firm. “It happened too fast for us to respond. But our competitors took advantage of it, which directly affected our growth and customer base.”
The bottom line: The timing of economic downturns may not always be predictable, but they can be counted on to occur with some regularity. As a result, it pays to account for them when considering a deal.
MASTERING M&A THE HARD WAY: LESSONS FROM FAILED DEALS
UNDERSTAND EXACTLY HOW AND WHY SOME M&A DEALS FAIL TO LIVE UP TO INITIAL EXPECTATIONS, AS WELL AS THE LESSONS THAT CAN BE LEARNED FROM THEM.