It is little secret among decision-makers at corporations and private equity firms that M&A deals don’t always succeed after closing. Most credible estimates of the failure rate are enough to make any conscientious executive anxious. For example, a 2016 analysis of 2,500 deals by the firm L.E.K. Consulting found that 60% of transactions destroyed shareholder value. Studies cited in the Harvard Business Review and elsewhere place the failure rate between 70% and 90%.
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 #1: Weigh the risks properly. Leading deal experts weigh in...
Our study confirms that negative M&A outcomes are indeed commonplace. Nearly all respondents in the survey indicated that they carried out 10 or more deals over the past decade, and 42% said they were involved in four or more failed or negative deals during that period.
What’s more, nearly all of our respondents (94%) said they think at least some deals will inevitably end in failure. More than a third (34%) think up to 10% will fail, while a majority (55%) believe 11-20% will be negative and more than one in ten (11%) think 21-30% of deals will end badly.
“M&A deals do not always work out,” said the senior vice president of a US fintech company. “Differences between management and employees, operational problems, changes in regulation, and an increase in costs all can affect profitability. At times, a lack of experience in a certain field also impacts the performance of the acquired assets.”
This expectation — which exceeds the mere acknowledgement of risk — has the most serious implications for companies planning only a small number of acquisitions. Buyers must be prepared for the very real possibility that their transactions may not turn out as intended.
After all, one doesn’t have to look far to find recent megadeals, announced with great fanfare, that went down in flames. Take the US$2.3bn merger of the Arby’s sandwich chain and fast-food house Wendy’s in 2008. Just three years later, following a struggle to grow profits and leverage their bigger scale, the combined company sold 81.5% of Arby’s to a private equity group for only US$430m.
One solution is to hedge one’s bets with multiple deals: private equity firms and corporations that make multiple acquisitions may be better insured against the risk of occasional failure by virtue of their more diversified portfolios.
The Risks of Reinvention
For corporations, perhaps the most challenging type of M&A deal to carry out is one that reinvents the acquirer’s business model. Slightly more than 70% of our respondents said their recent failed or negative deals had been intended, at least partly, as a means of reinventing their business model. By comparison, 28% said their failed transactions were strictly intended to improve current performance.
Were these negative or failed deals intended to improve your company’s current performance, reinvent your company’s business model, or a mix of both?
“The acquisition was a part of our growth plan to penetrate a new area of the industry,” said the director of strategy at a Japanese telecommunications firm. “Ultimately, we feel that we moved too early, and without sufficient knowledge of the subsector.”
A prime example of the difficulties an acquirer can face with this type of deal could be seen in the infamous US$160bn merger between AOL Time Warner. For both the once-mighty internet giant AOL and cable company Time Warner, the tie-up was meant to be transformative. Yet the two sides failed to perceive the fact that their cultures were fatally incompatible. This meant they never cooperated enough to gain the advantages that seemed possible at the start.
The bottom line: Be aware that some rate of deal failure is likely. This means that the possible rewards of the deal must be commensurate to the risk involved. Also, be especially careful with deals meant to reinvent the acquirer’s business model they entail even greater risk still.
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.