Dealmakers know acquisitions carry risk. But when it comes to seeing the real-life vulnerabilities of a specific deal bound for failure, most don’t spot their own biggest problems in advance.
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 #4: Focus on regulatory due diligence. Leading deal experts weigh in...
This survey shows that four-out-of-five respondents (80%) didn’t see any warning signs that a given deal would fail.
However, 84% of executives admit: with hindsight, their failed deals could have been avoided if specific stages of the M&A process had been carried out differently. This may mean that future failures could be avoided if buyers systematically pay closer attention to these steps.
The second-most-cited part of the deal process that respondents called out for improvement was legal and regulatory due diligence (24%). And indeed, this phase can be especially complex.
“If the IP risks had been made clear to us right at the beginning of the deal process, it would’ve been easier for us to move ahead with the right strategy in mind,” lamented a managing director at a private equity firm that raised more than US$10bn for two funds in 2016.
Another respondent said that, for their business, multiple factors combined to create a perfect storm.
“The acquired company had significant debt on its books, and with new regulations coming into force as well, growth came to a halt completely,” said the managing director at a US private equity firm focused on distressed assets. “On top of that, there was corruption everywhere.”
These results indicate that dealmakers may need to allocate more resources to forecasting worst-case scenarios, testing assumptions and scanning for unforeseen problems — focusing on the unexpected in the due diligence phase.
Different issues also deserve attention in different sectors, naturally. For instance, environmental risk may be present in many oil and gas deals, while cybersecurity issues likely need to be prioritized in the consumer and financial services industries. Consultation with regional and sector experts can be invaluable when investigating potential regulatory issues prior to sealing a deal.
Increasingly, legal protections in the transaction contract are used as well, such as material adverse change clauses. These can mitigate risks that the acquirer feels cannot be addressed in other ways.
The bottom line: Executives admit that many deal problems could not have been foreseen. But by changing standard deal procedures, particularly in the area of legal and regulatory due diligence, risks can be minimized.
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.