Transactions in which the ownership of companies or their operating units are transferred or consolidated with other entities are known as Merger and Acquisitions (M&A). It allows the organization to grow, expand, or change its competitive position. But it is easy said than done. The process of M&A involves many predicted and unpredicted risks during the process. For the smooth transaction, it is important to understand the risk involved in these processes.
M&A is that even if you’ve seemingly accounted for every possible outcome, it doesn’t save you from new issues that can spring up. The list of issues that can arise is too long. Devoting more time thinking about the possible issues, you might end delaying the deal or even worst, end up losing the opportunity. So, rather than going around and being doubtful, few factors can be considered to minimize the unpredicted blow.
Let’s discuss some M&A transaction risks and ways to alleviate each of them.
Integration shortfalls risk
There are many integration shortfalls, of which poor integration planning and execution are found to be common among the reasons an M&A deal is interrupted or fails. Employee burnout, lack of employee buy-in from the target’s side, failure to capture synergies, and loss of value are some of the consequences that a company can face if integration is not as per the buyer’s mind.
Ways to avoid common M&A integration shortfalls:
To avoid such risks, the team responsible for integration practices should be made considering various aspects. The team should include professionals that can look after the ongoing of the entire deal and handle and dig new information. For example, have members of the due diligence team become part of the integration team which will help to have continuous process and information to make things easier. Members knowing value creation, IMO, project management, and HR.
This kind of team will better help understand all the aspects of the deal and handle all the information that comes across.
Overpaying for the target company
Shareholders are an important part of the business. But most of the time, they are left upset in the process of M&A. This happens when the buyer overpays for the target company. Thus, it can be considered one of the major M&A risk.
Ways to avoid overpaying of the target company:
Before acquiring any business, one should know why do you want to acquire this company? Once having the answer to this question that it will serve to propose in reaching towards your goal, one should next focus on valuation. Poor valuation is one of the major reasons for this risk. Hence to have a proper valuation done is a must. For proper valuation, collecting information such as tax returns, key financials for the last three to five years, a summary of the target’s organizational structure and the number of employees, and shareholder agreements happens to be most beneficial.
According to the information collected, it is important, to view the determined appropriate price as a limit, versus a starting point; this creates a powerful shift in mindset that results in paying the appropriate amount for a target company.
Poor due diligence practices
Due diligence is an important aspect of M&A. Most of the risk in M&A arises due to a lack of proper investigation of the target company. Companies are usually found failing to be prepared for legal due diligence and lacking diligence experience and expertise.
Ways to avoid poor due diligence practices:
Due diligence should begin as soon as the thought of acquiring a company comes into the mind of the buyer. The team for due diligence should include legal expertise, financial expertise, and some business expertise to understand and cover all aspects of the target company. If the team knows the industry that the target company belongs to, it tends to be more beneficial.
The diligence team plays a vital role both before and during the due diligence phase. Before due diligence has even begun, the team is responsible to generate the due diligence request list. This is where the diligence team can bring its expertise to bear. It helps not only to minimize the risk of surprises arising, but it also gets to the relevant issues faster.
While considering M&A, companies have large expectations. Overestimating synergies can prove to be disastrous to the deal. It is really difficult to estimate synergies as it is because even estimating correct synergy might turn out to be wrong.
Ways to avoid overestimating synergies:
Being reasonable when estimating synergies is perhaps the single most important step you can take. Given this, M&A project management platforms and valuation spreadsheets can be studied to determine synergies. Once you believe what the synergies are, you should reduce that number (common practice is dividing by two). This will allow you to be conservative regarding deal synergies.
Overall lack of communication and transparency
Communicating between teams is a must in processes like M&A. Lack of communication and transparency between the teams working in silos has been a common pitfall for M&A practitioners. Although many professionals today have become aware of the lost time. It has become the most common risk of deal failure in today’s scenario.
Ways to avoid poor communication and lack of transparency:
Technology can be the biggest help in situations like this. Using technology, there are virtual data room created for M&A to make secure sharing of information easier and more efficient. Real-time sharing of data makes it best to keep the deal transparent and communicated.
Thus, avoiding these risks one can practice M&A securely and avoid losing the opportunity to make the best deals. However, more risks can come interrupting the deal but having proper due diligence and reasonable estimation of synergies will reduce most of the risks.