Up to 90% of mergers and acquisitions fail, causing considerable damage to both the parent and acquired company. As complex as mergers and acquisitions are, there are certain signs that can predict it’s chances of success.
Three years ago, we discussed the 12 Signs That an Acquisition Will Crater which has since been quite useful to buyers, in identifying 12 risks and complexities in every mid-market business acquisition they could potentially come across.
Some of the top signs to look out for are:
M&A skills and experience. How much acquisitions experience is on your leadership team, and how long have those executives been with your company?
Cultural differences. How different are each company’s values, beliefs, work styles and behaviors?
Size of acquisition. Compare the revenues of the acquirer to the revenues of the target: This percentage is a key indicator of bumps ahead.
Amount of integration required. Merging operations and financial systems is hard work. Some companies are purchased and left to run on their own.
Earn-outs. When the owner/managers of acquired companies must earn a portion of the acquisition price after the deal closes, it seems like a great way to bridge the gap between how buyers and sellers perceive the acquisition price. In practice, however, earn-outs are hard to manage due to conflicts of interest, resource allocation disputes, and egos.
Operating team’s involvement. In some companies, the CEO and/or the corporate development department find, assess and buy businesses largely on their own. Once they’ve done the deal, they hand it over to the operating executives to integrate and operate.
Murky due diligence. The purpose of due diligence is to gain clarity on what you’re acquiring and its future prospects. When due diligence is cursory or the truth is illusory, it makes for surprises that increase complexity and risk.
The need for unpopular actions. Some acquisitions, especially of distressed companies, require the acquirer to make harsh, even drastic changes.
Change required of acquirer. Many companies make acquisitions to shake up their own organizations.
Visibility of change to customer base. The greater the change in brand image of the acquired entity, the greater the complexity and risk.
Expertise in acquired line of business. Many businesses choose to acquire companies they fully understand.
Cash available to manage complexity. Acquirers that spend all their available cash on buying a company will have no money left to manage the integration
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