An evaluation of the factors leading to M&A failure
A thorough understanding of causes of M&A failure would lead to a deeper understanding of the
working of M&A and leads to improved mitigation against such failure in future. An overview of
major causes of failure is provided by Bruner (2005), who uses survey data from 2,804
transactions in the US and ten case studies of prominent failures. He identifies overconfidence,
naivety and market segmentation amongst factors leading to failure. In addition, the author
advocates for scrutiny of motives, design and implementation as potential factors leading to
failure.
Developed markets face different challenges to emerging markets. Musanhu (2017), identifies
developed countries as having established capital markets with a well developed infrastructure,
emerging markets have less sophisticated infrastructure and fairly less developed legal structures.
Additionally, developed countries have stable democracies as compared to developing countries
often plagued with political uncertainty and unpredictable macroeconomic stance.
Design and implementation of M&A strategies is best depicted by cross border M&A deals. For
instance, Willer et al (2015), in analyzing Chinese outbound deals determines that Chinese
acquirers face various challenges comprising lack of clarity, inadequate deal screening, lack of
due diligence, inefficient communication with regulatory bodies, and post-merger issues
comprising, cultural integration, talent shortage and unclear governance structures.
Valuation has been noted as a main concern for the successof M&A deals. Johnsom(n.d)
advocates for a thorough financial analysis to inform negotiations and structure deals that are
rationala and have high potential for the success of the newly created firm. The author provides a
summary of the valuation methods;
Adopted from: https://www.valuationresearch.com/pure-perspectives/avoiding-failed-ma-deals/
Financial valuations of M&A
Stock performance analysis uses current stock prices to determine value. From this methodology,
it is often better to purchase a company when there is an economic downturn as the M&A often
yield higher returns. Stock performance analysis uses the technique of multiples. The use of
multiples as a method for estimation has come under criticism for being prone to various
shortcomings. Firstly, multiples are viewed as being too narrow as they make reference to single
points of reference at any one instance. Secondly, they are prone to distortion and inaccurate in
case of bubbles. Additionally, multiples are not comparable within and across industries. Finally,
they are used by persons with low company knowledge.
Discounted Cash Flow Analysis depict the value a firm is willing to pay for future cashflow that
in turn determine market value. Cash flow-based valuations are favored for being largely related
to reality and depicting the cash flow a company can expect to generate in the future, an amount
commensurate to the value it is being acquired for.
A total disregard of objectivity in valuation leads to mirage valuation. Mirage valuations were
fanned by the sentiments of the boom era and the depiction of success and growth as often
witnessed on the media. Valuation was rarely anchored in scientific valuation methods and was
to a great extent determined by past experience and euphoria from investments in the dotcom era.
Despite, the warnings, investors were often lured to mirage valuations by company signals that
had the aura of success, over optimistic growth figures and a fleeting macroeconomic stability
stance.
Forms of merger and acquisition
Mergers and acquisitions take various forms and consist of vertical mergers, horizontal mergers
and conglomerates. Horizonal mergers occur between companies offering the same product and
largely serving the same customer segment. The main motive is market dominance by creating a
larger firm that commands higher market power. These mergers are efficient in increasing
revenue and stemming competition. Additionally, larger firms’ capability to serve other markets
is greatly enhanced.
On the other hand, Vertical mergers occur where one firm acquires another that is in its industry,
but at a different stage in the supply chain. Vertical mergers are credited for improving logistical
challenges but are criticized for stifling competition by dominating the supply chain. However,
vertical mergers can also take the nature of providing complementary products or services within
the same industry. For instance, AT&T and Time Warner merged and the merger was adjudged
vertical. Anand (2016), observes that AT&T in content distribution and Time warner in content
production both faced dwindling fortunes and their merger was vertical in nature. The rationale
for the merger was determined to be one firm providing a product that serves as a complement to
the core product, content distribution. Vertical mergers lead to the concept of upstream and
downstream domination and the concern for anti-competitive practices by acquirers. However,
not all vertical integrations lead to anti-competitive prices, Alemu (2018) observes that a
vertically integrated firm can create better affiliation with competition and offer competitive
prices and product or service choices.
Finally, conglomeration merger s and acquisition take the form of firms coming together that are
not necessarily in the same industry or serving similar markets. Conglomerations serve the
purpose of diversification and the reduction of concentration risk on either one market of
product. In spite of the potential benefits, conglomeration has been on the decline; in favor of
more focused business models. The roll back on conglomeration has been capture by Limitone
(2018) who observes that America was built on exploits by conglomerates, however recent times
have witnessed de-conglomeration of some big companies. De-conglomeration is described as
the breaking up of firms into more focused units that have more compatibility with acquirer. The
need for de-conglomeration has also been necessitated by increased complexity in navigating
tariffs and overall business strategy. Ramachadran et al (2013), however, breaks rank with such
observations noting that conglomerates are distinct from corporate divisions by way of having
independent corporate affiliates with the power to determine strategy, raise capital and set
incentives. He identifies that this business model can prove effective to raise profitability and
effectively compete with rivals in various markets.
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