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Why Mergers and Acquisitions Fail

Reasons to choose Wilson Browne

A merger with, or acquisition of, another company can appear attractive and strategically logical, but it is not always successful.

One notorious example is when eBay announced it was buying Skype in 2005, for $2.6 billion. The acquisition failed after four years.

There were several reasons for the failure:

• eBay misjudged the potential value Skype would bring to its customers
• There was a clear culture clash between the two companies
• Skype went through an uneven management period during the four years.

Companies can have various motives for mergers and acquisitions (M&A), but there can be several reasons why these motives do not lead to success.

Why Do Companies Choose Mergers and Acquisitions?

Reasons for wanting to merge with another company, or take it over can include:

• Diversification
• Economies of scale
• Increasing market share
• Reducing financial risk
• Access to R&D expertise.

A successful merger or acquisition should add value, increase market share and boost profitability, encouraging greater investment from the synergies the change generates.

But things do not always work out this way.

Reasons for Failure

• A common reason for the failure of an M&A is a company overpaying for its acquisition. If this happens, there is a real risk that the results will destroy shareholder value. This hampers the M&A from the outset and may lead to further turbulence, or the deal eventually collapsing.

• A company can overestimate the coaction between itself and the enterprise it wants to takeover. This was one of the reasons for the eBay-Skype failure.

• A successful M&A must have a clear strategy driving it. If the transaction lacks a fundamentally sound reason for going ahead, this can ultimately mean failure. Generally, the more simple the motive for the transaction, the more likely it is to lead to success.

• Is the cultural fit right? This became an issue with the eBay/Skype acquisition, where the more conservative management culture at eBay clashed with Skype’s drive to greater democratisation of decision-making.

• The acquiring company can overload itself with debt if it overextends its resources in acquiring another enterprise, outweighing any strategic advantages it had hoped to gain.

• The timing has to be right. There can be external economic factors affecting the marketplace which put mergers and acquisitions at a disadvantage from the start.

• If there is a lack of management involvement, this can prevent transactions from running smoothly, and end up with unsatisfactory results.

• Finally, due diligence is essential in mergers and acquisitions, and it requires a good level of legal precision and investigative dedication. Correct due diligence can ensure a buyer has a comprehensive overview of what they are buying, including any potential risks. Without the correct due diligence, buyers are essentially buying blind, putting themselves at risk of making perilous decisions without meaning to.

For more information about our company and commercial law services, including acquisitions, disposals and advice on contracts, please call 0800 088 6004, or complete our online contact form, and we will be in touch as soon as possible.

Rebecca Flint-Hill

Posted:

Rebecca Flint-Hill

Paralegal

Rebecca is a Paralegal in our Company & Commercial Team based at our Northampton  office. She assists our senior fee earners in dealing with acquisitions and disposals, mergers and corporate reorganisations, management buy-outs, commercial agreements, shareholder disputes, corporate finance and legal formations. Rebecca is currently studying…