Why M&A transactions fail and how not to be one

​In the last few years, many companies and funds have been seeking productive and value accretive growth opportunities. Some invested in improving capabilities and therefore performance, others sought growth through mergers and acquisitions (M&A). As a result, the last few years have seen massive growth in performance improvement advisory work (revenue growth, cost optimisation, leadership effectiveness, digital and information leverge, and extracting value from M&A) which took advantage of a massive period in M&A. According to PWC, since 2020 there was over US$12.9 trillion in deals transacted globally, including US$3.3 trillion of Asia Pacific deals, making up approximately 64,000 transactions in Asia Pacific alone. While the mega deals have slowed since their peak in 2021, there appears to be a healthier level of mid-market deals that can drive transformation and growth. 
 
With interest rate increases, inflation, supply chain issues, a war in Europe, energy uncertainty, and other economic issues existing or looming, a recent survey by and American Bank found that 58% of survey responders from U.S. middle market companies still believe their companies will improve with 62% predicting that M&A will be the “primary growth driver.” And as transactions continue to close, the performance improvement initiatives necessary to derive planned value from existing and newly acquired businesses will continue to be critically important for the reasons outlined below.
 
Why up to 90% of transactions fail
 
For many businesses, mergers and acquisitions are a key tool to accelerate revenue growth through expansion into new markets, new products, new geographies as well as accelerated capability development. However, with a record-breaking volumes over the last few years, and similar activity in the first half of 2023, how many of these transactions are truly successful and create value for shareholders? Studies have shown that between 70% and 90% of transactions are not successful - they don’t live up to their investment thesis.  
 
A recent Harvard Business Review study reported that more than 60% of transactions actually destroy, rather than create, shareholder value and up to 90% fail to achieve their business plan. The reasons for failure are few in number but common in occurrence including:
 
1. Hubris and bias
 
2. Inadequate diligence and planning
 
3. Lack of integration strategy and priorities
 
4. Leadership and resource challenges
 
5. Poor communication
 
6. No end-state clarity
 
7. Slow or weak implementation
 
Many articles have been written and are available to help managers and executives. Capable and experienced guidance is available from advisors and yet, the cycle of optimism, failure to plan, poor execution, and lost value repeats. Why does this happen repeatedly? It was a known issue 20 years ago when I wrote about it in my MBA thesis. Still the problem has not been. Why? Some of the reasons are subject to much academic research with supporting data. Although with the benefit of years of observation there are some clear signs that emerge.
 
One reason this phenomenon repeats over and over again is, like the cause of many business failures, hubris. James Hollis, author of What Matters Most, says that “hubris, or the fantasy that we know enough to know enough, seduces us toward choices that lead to unintended consequences.” Over my time, I have seen many  executives - particularly those who have been successful, operate under the mistaken impression that they are too smart to fail, that they are more insightful than what the team, data, and advisors are telling them; that because they feel it, it must be so. Continued success has thie ability to entice one’s thinking. As a result, the overconfidence in themselves and their optimism around the investment thesis can very easily bias the diligence for a deal. It can cause red flags to be ignored. It also can result in the willingness to ignore early integration planning and resourcing. The “we’ll work that out later” mentality can be pervasive in the heat of the deal. . But that can leave key team members out in the cold resulting in poor morale, lack of support for the transaction, and unwanted departures. It can also brings members of the deal team and the executive unprepared to a Day 1 post financial or contractual close without the necessary foundation for integration and success. 
 
Fortunately not every executive or fund manager lacks humility or the willingness to listen or listens with a biased perspective. Yet a majority misstep and fail when pursuing a transaction. Why else, then, might smart people repeat the same destructive pattern over and over? 
 
One core reason for this repeating challenge is the ever-present drive for growth and the fact that capital needs to be deployed to create a return. Shareholders and fund managers demand it. The adage of a “lazy balance sheet” drives a lot of bad behaviour by smart people. This is also true of financiers who are under pressure to lend, sometimes doing bad deals rather than no deals. It’s also true of companies and funds under pressure to grow. Executives have growth mandates. They often are measured and rewarded by growth oriented KPIs as well. If the goal is growth or the objective is putting capital to work, the outcome will likely miss because the starting point is wrong. The starting point for a good transaction needs to be that:

1. there is a clear and objective reason for the businesses to come together
2. there are compelling synergies that can be achieved
3. there is a cultural fit and
4. the companies (or at least one of them) are healthy and have a solid foundation

If any one of these reasons are missing, the transaction is unlikely to succeed no matter how great the opportunity seems on paper. The impression of growth is not growth. Real growth requires an open mind, hard work, planning, and outstanding execution whether done organically or via acquisition. A purchase is not the easy path, at least not in the long term.  
 
Which brings us to the last reason successful executives continue doing bad deals despite all the lessons in plain sight. It is difficult to grow a business organically and it is getting more difficult as time goes on. Price power and leverage get harder to achieve as time passes. Margins and efficiency get harder to realise with increased global connectivity and commoditisation of services.  
 
As Jim Collins, author of Good to Great said: “Good is the enemy of great.” So few achieve great because it is easier to settle for good. Of course good does not really deliver growth so transactions result as a way to grow that lack the requirements for success: a reason, synergies, cultural fit, a solid platform. In short, transactions appear to be an easier way to grow but, time and again, the destruction of shareholder value in many transactions prove that appearances are deceiving.  
 
Don't be one of the 90%
 
OK, so you are thinking about an acquisition. You think the success criteria are there and you’ve checked yourself for hubris and that’s absent too. Great. Now how do you avoid becoming of the litany of failures?  
 
1. Fight against bias. We tend to look at a deal. We tend to like it. We have dreams of it being a success. And, with that, have created a mental investment, a bias, that precludes us from seeing clearly. “We are all biased. Our brains were designed to be. We categorize information to store it, which means we have to make judgments. Those judgments rely on our past experiences, which, in turn shape our perspectives. They help us figure out what is safe (generally, what is known) versus where to be cautious (generally, what is unknown). So, bias always plays a role in decisions.” But, our brains don’t work brilliantly when conditions for bias exist. Nowhere is the condition for bias stronger than in risk-reward situations under stress. So, to fight against bias, be curious, be willing to re-evaluate as new data comes in; listen. Do not be so invested that you aren’t willing to pull the pin if needed.  
 
2. Broaden due diligence and plan early. Though not to be self-serving, hire good advisors so that the people evaluating the deal aren’t you, don’t report to you, and don’t have a stake in the outcome. Be ready to hear the reasons why not. Don’t mark the naysayer as simply negative. Go broad when seeking the real issues for success. Focus on not just the financials but the market, the customers, the products/services, the systems, the foundation of the entities, and, most of all, the people, the culture. As Peter Drucker said: “culture eats strategy for breakfast”. If any of the information coming back about the combination, at any time, feels funny or off, do not ignore that feeling. Intuition can be an accurate foreteller. And, if the diligence appears positive, begin planning immediately. It will always take longer than initially expected. Also, the process of pre-planning is a form of diligence in and of itself. It is one thing to say, “Put these two things together.” It is another thing entirely to plan out the how of putting them together. In that process, it will either start to appear workable or it will start to become obvious that it won’t. Synergies aren’t created without an early plan, a talented integration team, clear priorities and communication, and outstanding project management.
 
3. Formalise the integration strategy and priorities. Over the course of the merger or acquisition process, good company leadership focuses on managing a meticulous due diligence process, risk assessment review, marketing testing, and capital raises to achieve close. But the integration strategy and work needed to ensure the transaction is value-add in the long-term must be initiated in tandem with the due diligence process and implemented immediately upon closing. The transaction is the wedding. The integration is the marriage. To deliver value from any transaction, it is critical that:

1. an integration team be appointed
2. a comprehensive integration map and checklist be developed and planned for during the deal process, and
3. once the transaction closes, outstanding project management to integrate the newly married entities. 

Often times, we see leadership teams do all the right things up to prioritising the list of tasks required to be thought-through and implemented.
 
4. Clarify leadership and resources. Of the many transactions that come off the rails, the most frequent roadblock involves people. There will likely be conflicting points of view as there will be two sets of leadership teams with different contexts. The two sets of leaders have to decide early on who is going to be part of the integration team, who will lead what, who will stay and who will go (if there is to be consolidation), who will be privy to the planning, and who will make the tough calls when they arise. This is particularly challenging since most people are conflict averse and early in the process no one wants to give anything away lest it doesn’t work out. Yet, the paradox is this: If control is not taken and ceded, if trust is not created and relied on, the transaction that everyone wants to work stands a far greater likelihood of failing. 
 
5. Communicate, communicate, communicate. One of the biggest failures comes from the area of communication. There can be over-steps and there can be vacuums. Both create more problems than the effort required to remedy the error. Key people internally need to be in the loop. The challenge is ensuring you select the right “key people”. But, once the hard work of selection is done, no secrets. That team of key leaders can then work out a communication strategy for the market, for customers, for vendors, for employees. The human brain can’t stand a vacuum. Absent information, people make things up to fill the vacuum and it is almost always far worse than the truth. Clear communication about the why, the how and the what it means for people is the only way to ensure you retain staff, customers and suppliers. Of course, there is a time and place for all communication. But, it is almost always earlier than you instinctively think.
 
6. Begin at the end and be ready to go. In the same way that a transaction needs a reason to be, a clear path from here to there needs a “there” in clear sight. A vision of what success looks like. As Stephen Covey said: “To begin with the end in mind means to start with a clear understanding of your destination. It means to know where you’re going so that you better understand where you are now and so that the steps you take are always in the right direction.” In any implementation, success depends on good people, correct and prioritised tasks, and speed. Implementing immediately post-close to prevent or solve for any integration plan gaps as quickly as possible. The leadership team and integration team must be prepared to act quickly and pivot as needed, which may include making difficult decisions regarding people and systems.
 
7. Finish strong. All the planning in the world accomplishes nothing if it doesn’t translate into strong integration and performance improvement implementation. Bring an open mind, a solid plan, achievable priorities, the right leaders, transparent and inclusive communication, and strong project management. The performance improvement measures that are almost always factored into an investment thesis – such as accretive revenue growth, optimised costs, the creation of an effective workforce, and integrated and modernised systems – must take place quickly and efficiently while also engaging the combined workforce for the benefit of the transaction to be realised. It’s a massive task, but it is possible. 
 
While there is no guarantee that any transaction will ultimately be a successful value-add transaction, incorporating the recommendations above can help organisations develop a strong plan and foundation for integration. If implemented properly, these steps can reduce the risk of failure of M&A deals.