The Persistent Failure Of Merger and Acquisition deals and why

3 min read

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M&A is not about transforming a company. It is about understanding what stays the same while everything else changes.

Every day, we hear about a recent merger or acquisition.

The headlines follow a well-oiled pattern: a significant amount of money a bidder intends to invest in a target company, along with references to financial, market, and potential human repercussions (employees and customers).

It frequently results in financial speculation and, in many circumstances, an increase in the stock price of both firms, justifying why companies spend more than $2 trillion on acquisitions each year, despite a failure rate of more than 70%).

The life sciences industry is no exception. 

Many multinational corporations have traded their research investments and divested entire divisions to have cash on hand and acquire the next blockbuster drug.

The pandemic has highlighted the need for healthcare and life sciences funding. Because of this, several pharmaceutical companies have increased their acquisition, divestment, and spin-off rate of business units in search of higher earnings, expansion, or survival despite the economic downturn.

Second-half 2022 continued this trend, with several intriguing deals (including the $1.3 billion PharamaLex acquisition) occurring amid inflation and market turbulence.

However, there is a catch. Mergers and acquisitions aren’t your everyday business transactions and can be challenging to manage.

Why do mergers and acquisitions fail? What are the most common risks?

Numerous issues can develop during a merger or acquisition.

When a merger or acquisition goes poorly, it’s usually because the merging companies aren’t a good fit for each other.

The success of a merger or acquisition depends on the time and resources spent integrating the two companies operations, standardizing their approaches while preserving their unique characteristics, and developing a plan to align their core beliefs.

Below, we’ll analyze some of the most significant threats and provide a countermeasure that, if incorporated into the strategy and handled by seasoned professionals, can help the new organization thrive in an uncertain environment.

Overimposing integration

Integration is the beginning and the end of each merger and acquisition agreement.

Companies make the mistake of focusing just on the financial components of M&A plans, and as a result, they miss out on some of the essential aspects that contribute to value creation. Identification of linchpin employees, strategic in-flight operations, supplier dependency, and demand constraints are some critical aspects overlooked in due diligence.

What can help?

When combined with an overarching strategic vision centered on change, digital technology has the potential to turn this issue into an opportunity. Artificial intelligence makes it possible to pinpoint the most crucial component and weigh several scenarios. These scenarios range from designing more efficient processes to taking the best of the best companies that have merged to automating repetitive aspects or even outsourcing components that are not crucial.

Takeaway

Before day 1, knowing what makes sense for the amalgamated organization will improve efficiency and agility.

Culture and value

A merger necessitates the integration of two cultures, putting aside differences or allowing regional/local firms to run their individual units with clear profit targets and strategies.

The buyer’s culture does not have to be the most successful. If the M&A deal is well-conceived, it must provide benefits beyond the size or market share strategy, and this demands clear targets that account for diversity while laying the groundwork for shared value.

What can help?

Internal biases will prevent any company from conducting objective assessments, making it impossible to manage this transformation. A lack of experience demonstrating how seriously stakeholders take the change will produce resistance, delaying the birth of the new entity and, ultimately, resulting in stronger localizations.

Takeaway

M&A offers a unique opportunity to reset the organization around ideals that build an identity that removes biases while reviving values.

Unrealistic expectations

Mergers and acquisitions have the potential to either create or destroy value. The ability of the stakeholders to establish the new integrated organization with reasonable expectations is an essential factor that will determine the outcome. Once they realize the importance of the M&A transactions, stakeholders need to conduct a comprehensive narrative analysis and recognize that they are currently participating in a variable-sum game in which communication plays a foundational role in ensuring the highest possible payback.

What can help?

To retrace the expectation around an internal and external perspective, both parents should delegate authority to an impartial (not internal) Change Team. When analyzing the newly formed organization, the attention will focus on identifying and filling deficiencies that become apparent after Day 1, with the dedication to making the most efficient and effective use of resources in the medium and long term. Analysis of cross-selling opportunities, rivals’ reactions, and post-sale support should all contribute to a feedback loop that could lead to deliberate course corrections.

Takeaway

Reassess market position, expectations, and business trajectory.

Conclusions

Large organizations in several fields now have dedicated Mergers and Acquisitions departments.

Financial benefits promised at the outset of a due diligence process rarely materialize as per plan.

In most cases, this is due to stakeholders underestimating the difficulty and complexity of combining forces.

External factors dominate M&A deals, especially in a highly regulated industry. Unexpected regulatory changes, new technology breakthroughs, and market shifts may cause the return on investment to be delayed or even halted.

Inability to maintain focus on the desired objectives, failure to develop a concrete strategy with appropriate control, and refusal to follow adequate integration processes can all result in the debacle of any M&A transaction.

When dealing with mergers and acquisitions, there are three hazards to transforming into chances for change. These include:

  • Anticipate potential conflicts by carefully coordinating the blending of the cultures to make the post-integration strategies implementation easier.
  • Utilize the transition as an opportunity for a fresh start and to realize synergies by standardizing and unifying processing to achieve a more agile design.
  • The newly merged entity is not solely on paper but as a living entity in the overall business continuum. Reassessing expectations help realize value.
Flavio Aliberti Flavio Aliberti brings with him a 22-year track record in consulting around business intelligence, change management, strategy, M&A transformation, IT and SOX auditing for high regulated domains, like Insurance, Airlines, Trade Associations, Automotive, and Pharma. He holds an MSc in Space Aeronautic Engineering from the University of Naples and an MSc in Advanced Information Technology and Business Management from the University of Wales.

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