Causes of Failed Niche Mergers and Acquisitions
The history of M&A transactions is as populated by the corpses of deals gone bad as by shining beacons of effective execution, so it is natural to wonder what causes successes and failure in niche mergers and acquisitions. The single biggest cause of failure that most experts will point to is lack of due diligence. In other words, cultural differences are a fact and lack of preparation for managing those differences contributes to the 70% failure rate for M&As. Another obvious cause is making poor choices – sometimes a merger isn’t the best way to grow in a niche market, but due to various factors that inhibit criticism from within a firm considering a merger, the deal goes through anyway. On the other hand, just avoiding these pitfalls isn’t enough to ensure success in a merger or acquisition.
The top three problems that can kill a merger or lead any M&A deal to fail are poor fit, unnoticed and undesirable aspects of the target, and communication breakdown. Poor fit includes difficulties relating to cultural clashes, strategic goals, and organizational compatibility, size, and ego clash. Some experts suggest that this is the worst set of problems, because it derives from the most preventable error, lack of due diligence. What’s more, M&A failures that result from these mistakes kill deals that could have been profitable, and not due to a lack of capacity but rather a lack of execution.
Problems with bad deals result from lack of research into and knowledge of the acquisition or potential-merge-partner in question, overvaluation of the target firm either from market overheating or an extended bidding war, unrecognized inefficiencies and unwieldy management, a lack of product compatibility and over-diversification, and resource misallocation. Communication breakdowns stem mainly from a lack of understanding of cultural differences that leads to miscommunication, unprepared management who don’t take control quickly enough or express corporate needs and goals to new team members, insufficient concern for working out personnel “people” issues, and overextended top management that do an insufficient job with follow-up. All of these problems will result in an acquiring firm being unable to derive value from the expensive niche M&A undertaking.
The overriding principals that can facilitate a company’s ability to prevent failure in a niche merger or acquisition are preparedness and expert judgment. Between conducting the necessary investigations to assure that a potential merger or acquisition is a wise investment, worth the price, will add value, will fit culturally and strategically, and practicing the business habits and good judgment necessary to capitalize on a good deal and then carry out the necessary practical measures after a deal has gone through, a firm can create at least the opportunity to come out ahead after a merger or acquisition in a niche market.
But avoiding major mistakes isn’t sufficient by itself to make an M&A deal a success. Appropriate (expert even) research, executives and advisors with previous experience, a well laid out strategic plan that includes the pending merger or acquisition as a step towards a specific goal, and a deliberate industry or product specific focus that informs choosing the M&A target are all important elements to produce a successful merger or acquisition in a niche market.
John Brown is a retired financial advisor specializing in M&A deals. If you would like to learn more about merger & acquisitions in specialized niches visit Valence Group.
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