Question

What do you think are some of the main reasons the mergers tend to fail?

Answer 1

Merger is a corporate action where one company A unites with another company B to create a combined new entity C. Companies use mergers to increase its market share, lower cost of production, improve its profitability and in turn enhance shareholders wealth. However, in most of the case, mergers and acquisitions has not produced the intended results.

Some of the major reasons for mergers to fail are explained below:

1) Over- estimating the value of target company - Companies employs M&A advisors who gets paid only if the deals goes through which results in valuation bias.  Companies often over-estimate the value of synergies or cost efficiencies which are never materialized.

2) Cultural integration issues - Every company has their own style of working. They differ in the way they treat their internal and external stakeholders. The contrast is more when companies are based in different countries. If the cultural difference issue is not addressed from the beginning, it will lead to lower employee productivity and loss of clientele.

3) Lack of clarity on future strategy - After mergers, differences starts to arise among top management on how the entity should move forward. A lack of clear integration process and goal plan along to achieve the stated synergy value may lead mergers to fail.

4) Change in external business environment - It is also possible that external business environment has changed may because of regulatory changes or Government policies or some shock in input prices which may lead to taking hard decisions.

5) Limited Management bandwidth - A proper assessment should be made on the current company's capacity and management bandwidth to make the deal successful. If the current management or firm's resources is already fully utilized, there is not enough capacity/bandwidth to deal with unknown challenges in merger which may slow down the overall merger process.