Indeed, M&A Community wrote in April of this year (2024) that around 90% fail. And it listed a number of high-profile examples – AT&T and Time Warner in 2018 at a value of $85bn, Microsoft and Nokia in 2014 at a value of $7.2bn, and Daimler-Benz and Chrysler in 1998 valued at $36bn.

For the world of print, on a smaller scale, we can point to the businesses linked to Darren McMurray and the PFI Group. As Printweek noted in May: “McMurray’s calamitous acquisition spree has resulted in the failure of a raft of signage businesses, with creditors left owed millions of pounds.”

Then in October, Printweek wrote of the sad closure of family-owned of Northwolds Richardson Group which went under as a result of the effects of Covid-19 and rising energy costs, despite the acquisition of a local competitor to improve the overall order book.

The causes of failure

Robert Collier, a partner at VWV, knows that corporate transactions are often “inherently complex” and can involve “substantial financial and legal commitments for the buyer”.

He says that whether it’s a merger, acquisition, or joint venture, “these deals can offer significant rewards when executed properly”. However, he comments that “there are potential pitfalls that could lead to costly disputes, regulatory scrutiny, or even financial liabilities for a buyer”. He thinks that one of the most effective ways to lower the risks is through good due diligence.

Collier says due diligence involves a comprehensive assessment of a business or its assets to establish value and uncover potential liabilities; such investigations can cover commercial, financial and legal issues.

He says “The process typically includes an in-depth review of financial records, contracts, regulatory compliance, and operational capabilities. The scope of the exercise can vary based on the transaction’s nature, the size of the companies involved, and their respective sectors.”

Of course, mergers can fail for numerous reasons. Even so, Andrew Brown, a partner in Corporate Commercial at Myerson, reckons that one of the top causes is a lack of due diligence.

He considers that “the mantra for any buyer when it comes to acquiring another business is ‘buyer beware’”.

He says: “Without a full due diligence exercise, there is an obvious and significant risk the buyer’s vision for the future of the target business may not be realisable due to issues it has not been made aware of.”

Here Freya Summers, a partner in the corporate department of Wright Hassall, offers a potted guide as to what to look for before proceeding.

She recommends “looking at financial health with a detailed review of financial statements, liabilities, and cashflow. Then consider cultural compatibility and assess whether the two organisations’ cultures and management styles align”.

Next, she would consider operational fit and in so doing, checking how well the systems, processes, and technology will integrate.

Allied to this is the necessary legal and regulatory compliance which, as she says, will “ensure that there are no hidden liabilities or compliance issues”.

Then she recommends looking at talent retention which means “identifying key personnel and strategies to retain them post-merger”.

Lastly, Summers would tackle strategic alignment to ensure that “the target aligns with long-term corporate strategy and will create meaningful synergies”.

Integration is the goal and on this Brown considers that the acquisition is very much a first step in the process. As he says: “An important part of making the acquisition a success is the process of integrating the target business into the buyer’s existing operations. This may entail implementing practical changes as well as making internal policies and procedures uniform across the enlarged operation.” By this he means combining offices, bringing in a new management team, integrating IT systems, financial/accounts, HR, and terms of trade.

Indeed, Summers thinks that one key problem for management is “overestimating the synergies or potential of the target company; acquirers may have unrealistic expectations, leading to disappointing results”.

Moving on, Brown reckons that communication between managements and different divisions of the new business will be also “vital in ensuring the integration process is a success.” Brown warns firms on a buying spree that moving from one acquisition to the next without ensuring the integration process for the first acquisition is fully implemented risks negative impacts.

And Summers agrees, commenting that “poor management of the integration process, including ineffective communication, can derail success”. She has seen that overly high self-esteem can affect the outcome of deals: “Egos can certainly come into play, particularly if leadership is too focused on making a ‘big’ deal rather than a sound one.” For her, the best mergers happen when all parties engage with a realistic, strategic mindset.

But there’s another factor that Brown addresses: the incentivisation of sellers. By this he means that if sellers are to remain involved in the new entity going forward, they should be left feeling “as though they have achieved a fair deal and incentivised further to achieve efficient integration and grow the business”.

Naturally, the overall financials are important, but Brown thinks that there are other reasons to acquire including the need to secure a product line, manufacturing process, IP integral to the business or to provide a complementary service.

A matter of culture

As noted earlier, the corporate strategies of firms must be aligned and an acquisition target that has a good cultural fit with the acquiring business is certainly an advantage. Here Brown cites the acquisitions of law firms and accountancy practices which are essentially people businesses: “When it comes down to integrating people the cultural fit becomes even more important. If they are not compatible, then you can be certain that staff retention will be impacted.”

He adds that the same can be said in firms that deal with customers, especially in a consumer facing business.

By extension, if the acquisition is more about products or processes, then cultures may be less of a priority.

This said, Summers reckons that one of the biggest reasons mergers and acquisitions fail is the fact there is a cultural misfit. She’s seen this happen “when two companies’ working environments, values, or management styles clash, meaning integration can be difficult”.

In contrast, she says that successful mergers occur where corporate strategies are aligned. However, “if companies have vastly different long-term goals or business models, it’s unlikely the deal will yield sustainable success”. The merger of a growth-focused tech company with a cost-cutting industrial firm which could lead to conflicts in priorities is hardly going to end well.

Establishing value

Do some firms pay over the odds out of desperation? Do some CEOs lack the ability to see when it’s time to withdraw?

From Summers’ perspective, the answer is yes, this does happen. Here she worries that some deal-makers end up “focusing solely on the financial metrics like EBITDA, revenue multiples, or cost savings while overlooking non-financial factors such as culture, operational compatibility, and the integration process can lead to negative outcomes”.

Brown points out that, typically, buyers will be supported by their accountants or a corporate finance adviser from the outset and a valuation will be a key element of the advice such advisers would provide.

“Especially in recent times when bank funding has been less readily available,” he adds.

Collier see the due diligence process as the saviour here as crucially it verifies the value attributed to the business by the buyer. As he puts it: “Through detailed analysis of financial records, operational performance and market position, due diligence helps ensure that the buyer’s valuation, and the price it pays, is based on realistic and accurate data.”

He advises buyers to keep in mind that although legal documentation may include mechanisms for financial redress through warranties and indemnities, these are essentially ‘after the event’ solutions. They may provide some level of protection post-transaction “but generally – if there are risks – it is better for a buyer to adjust its offer, or even withdraw from a purchase if risks are significant.” Due diligence allows parties to lock the stable door before the horse bolts.

But in practical terms, Brown says that establishing the price is usually the first element that is agreed between the parties and typically this would occur before commencement of the buyer’s due diligence and the drafting of any legal documents: “As a first step in the process, the parties would typically enter into an NDA. The seller will then supply the buyer with certain key financial and other due diligence information. The buyer and its advisers would then review this information with a view to putting a proposal to the sellers.”

He says that once the price is established, the parties would generally enter into a non-legally bindng heads of agreement. The buyer’s due diligence exercise would follow and where adverse issues arise Brown says it is not uncommon for the buyer to initiate a re-negotiation of the price. If the issue is material and an adjustment to the price cannot be reached, it could lead to the parties walking away from the transaction.

Summers takes the same tack, commenting that “value should be established using multiple valuation methods while also considering non-financial factors like strategic fit and the long-term potential of the acquisition”. Like Brown she says “it’s critical to have clear criteria for walking away if the price exceeds the realistic value” – this is where experienced corporate finance lead advisory teams can really earn their keep.

Even so, Summers makes the point that deals are more than accounting transactions: “Acquisitions are not just about numbers, they’re about combining people, systems and processes. If these softer aspects aren’t considered, financial gains can quickly be wiped out by disruptions, low morale, or high turnover in key personnel.”

The importance of good advisers to success

Just as a doctor who treats himself has a fool for a patient, so it is with a board that acquires a business without good external advice.

In this regard, Brown details that a good adviser will see the bigger picture and will, “if circumstances dictate, even if it is not what the client wants to hear, advise a client not to proceed with a transaction”.

It shouldn’t be a surprise that Summers too thinks that good advisers are critical to the success of M&A deals. And she says this because she feels that “they bring perspectives, experience and expertise to assess both the financial and operational aspects of a transaction”. As she puts it, “a good adviser is one who understands the client’s business and personal drivers and provides honest, actionable advice”.

Advisors that Summers considers to be essential typically include corporate finance experts and solicitors, and in some cases, specialist tax and transitional experts. She’s pleased to report that “most clients do follow their advisers’ guidance”.

Overall, Brown says that “in our experience, clients that listen to and accept professional advice, tend to generally be more successful in their business ventures”.

Good and bad practices

When it comes to outlining where firms make mistakes, Brown cites four areas: Proceeding without suitably detailed head of terms to focus minds on the main elements of the transaction; trying to get the deal done within a short time span, which may lead to issues being overlooked and mistakes being made; taking an overly aggressive approach to negotiations, which may harm ongoing working relationships; and allocating a limited budget to professional fees, which may constrict due diligence.

Summers relates to this; she has seen one deal in particular fall apart because the acquirer didn’t investigate the target’s operational systems properly. She says that “after the deal closed, they discovered the IT infrastructure was nowhere near as advanced as anticipated”.

In contrast, she tells how she worked on a merger where both companies spent significant time on cultural integration and “involved HR early, mapped out areas of cultural overlap, and offered leadership training to ensure a smooth transition”. She says that the focus on people and values led to a highly successful merger.

But as to how to make sure a deal is successful, Brown suggests a number of key steps.

He would begin by appointing advisers with the experience and expertise to advise on the transaction. Next he would take financial, tax and legal advice from an early stage and thinking fully about due diligence so that more time is spent on important assets or defined areas of risk.

Brown would advise sellers to seek confidentiality obligations from the buyer. Similarly, he would tell buyers to seek exclusivity from the seller to help them carry out negotiations with, if possible, some cost comfort from the seller should they terminate negotiations unfairly.

Then he would recommend thinking through the material terms of the transaction as early as possible.

Other matters

Lastly, there are some other areas that firms need to consider such as the structure of a transaction as these too can have a significant impact on the success of an acquisition.

In relation to this Brown notes that “a share sale will mean the buyer will inherit the target company with all of its assets and liabilities; whereas an asset purchase will allow the buyer to pick and choose which assets and liabilities will be taken on”. Even so, he comments that “notwithstanding this, suitable transaction documentation can apportion and allocate liability and responsibility appropriately”.

And from a buyer’s perspective, the deferring of payments will benefit cashflow. And then there’s the management of risk, as “such deferred payments can be adjusted depending on the performance of the business following completion, typically known as an earn-out”.

Further, Brown says that “a buyer can manage risk by identifying certain key liabilities and ensure with an indemnity that any liability in respect of those matters is made good by the seller.”

But beyond this are a couple of other issues that Collier draws attention to. First on his list are issues with intellectual property rights which “can represent a significant asset and part of a company’s valuation. Failing to adequately assess this can result in costly litigation or loss of competitive advantage”.

And then there are regulatory matters which “may be specific to the sector in which the business operates but may, equally, be of general application, for example data protection, anti-bribery or health and safety rules”. Either way investigation here may raise red flags.

Summary

To conclude, corporate transactions do pose potential risks, but they can be ameliorated through good use of due diligence.

In essence, by taking proactive steps to uncover the unknown while checking on financial information, confirming regulatory compliance, IP rights, cultural fit, and so on, an acquiring firm can do its best to protect its position while looking to the future. Beyond that, success will of course require hard work.