Although mergers and acquisitions are supposed to bring value to the companies involved, nearly 70% of mergers and acquisitions fail. In a business merger, two companies unite to form a new company in order to grow revenues, expand, take a larger market share, and improve profits. In an acquisition, one company purchases the other in order to take control and reap similar benefits – gain market share, decrease competition, obtain new technologies, etc.
It’s Not Always Happily Ever After
The pressure for companies to earn on their existing cash is one of the main reasons why shareholders and CEO’s get excited about a M&A deals. However, the transaction, despite the buzz it may cause, doesn’t always end up happily ever after. In fact, most M&A deals fail and lead to at least one of the companies losing a lot of money.
In order to understand why some M&A’s don’t work out, let’s look at some famous fails in M&A history and why they failed.
1. Facebook & Whatsapp
Reason: Poor Culture Fit
In 2014, Facebook bought messaging platform Whatsapp for $22 billion. However, the companies quickly realized the had clashing company culture. There are some memorable articles about arguments over desk size and toilet stalls, but what it came down to was the discrepancy in values. Whatsapp famously valued privacy for their customers and employees (no wonder they had an issue with short toilet stalls), while Facebook has more of an “open door” policy when it comes to privacy. With Whatsapp committing to no ads and encryption for their customers on the app, this clearly was not a match made to succeed, and the Whatsapp founders eventually left Facebook.
2. eBay and Skype
Reason: Unnecessary Technical Integration
In hopes of providing better communication channels for buyers and sellers on the e-commerce giant, eBay, they bought Skype in 2005 for $2.6 billion. However, Skype’s VoIP tech simply did not appeal to eBay users and the technical integration just didn’t ever work out. eBay tried turning over the management at Skyper, but in the end, they just missed the mark on what their customers wanted – or more importantly, what they didn’t.
3. Nextel and Spring
Reason: Opposing Target Market & Poor Post Acquisition Integration
One of the most important aspects of a successful merger or acquisition is making sure both companies agree on who their customers are, and how to integrate the businesses to serve that market optimally. An example of a merger that lacked synergy on these fronts was the $35 billion Sprint and Nextel Merger back in 2005. While Nextel was serving more of the business/enterprise market with their walkie-talkies, Sprint was targeting customers who wanted sleek new phones. This lack of proper integration left customers confused and Sprint getting rid of Nextel’s network altogether in 2013.
How to Avoid M&A Failures
Although the odds are against most M&A deals, there are steps companies can take to increase the risk of success:
Third party validation of acquisition
Having an investment advisory or private equity firm validate the deal prior to executing the deal is a good insurance policy to making the terms suitable for both parties. For instance, having an M&A professional or multiple professionals verify that the price is not higher than the combined present value of future cash flows of the company can ensure that the purchase is worth the price.
Execute Proper Due Diligence
Although excitement is important in the momentum of a deal, proper due diligence, even if it takes a while, is crucial to any successful M&A deal. Detailed review of the company’s financials, technology, company culture, and management must be complete before the deal is signed and integration begins.
Consider Hiring an M&A Integration Professional
It might not be obvious, but the real work begins when the companies have merged and begun to carry out all the plans they dreamed up when they came together. This however is a science in and of itself and would be best executed with the help of an M&A integration professional.