Navigating the Risks of the Contemporary M&A Market

Whilst mergers and acquisitions remain a key element in the growth strategy for many corporates, a recent survey conducted by Findex, in conjunction with Financial Executives Research Foundation highlights the major risks across the M&A value chain. This report is based on the recent deal experience of senior finance and M&A executives from around the world and addresses how these risks can be mitigated.

Failing to meet value expectations

A key theme emerging from the survey is that many deals are still failing to meet value expectations. In fact 60% of respondents considered overpaying for deals to be the biggest risk in M&A, with a high degree of competition – particularly in some sectors – pushing up valuations. With companies clearly under pressure to deliver growth, this is often reflective of the low cost of debt and often limited availability of quality targets. With substantial amounts being allocated to goodwill and other intangibles, executives are very aware of the risk of impairment write-downs – and criticism from the market – if acquisitions do not deliver the expected returns.

Fuzzy growth strategy risk

A similar proportion of senior executives highlighted the risk associated with a “fuzzy” growth strategy or specific deal rationale. This can lead to chasing too many targets with poor strategic alignment, as well as overestimating potential synergies. In our experience, successful approaches involve proactively developing a clear M&A strategy and pursuing a pipeline of strategically-aligned proprietary targets. We find that participating in a higher percentage of auctions, rather than proprietary deals, (and a poor success rate in auctions) is often a strong indicator of a reactive and poorly-focused M&A strategy.

Integration issues

Successful integration was identified as the most overlooked risk area and one of the major impediments to realising the full value from a deal. Key issues highlighted by respondents included underestimating the time and resources required to realise projected synergies, as well as a lack of follow-through and post-close accountability. Companies that leave this to operational management are particularly at risk. The most successful acquirers deploy dedicated project management resources to drive and oversee the integration project. Allied with this, respondents highlighted the risk of insufficient operational due diligence, either resulting from a lack of involvement from operational management or restricted access to the target.

Cultural transition issues

Another major risk identified relates to people and cultural transition. Key challenges include:

  • Management capability and organisational restructuring
  • The alignment of values and “winning the hearts and minds” of the acquired company’s employees
  • The more practical issues around remuneration and benefits.

Addressing these issues, which are often particularly complex in cross-border transactions, is fundamental to a successful integration and change management plan.

International deals

The report also addresses the specific risks associated with international deals, with respondents considering identification of the right acquisition targets to be the single biggest risk.

Other key risks highlighted in the report result from a limited knowledge of the culture, market dynamics and operating environment, including the legal, accounting, taxation and regulatory environment.

Post-deal, the biggest risk was considered to be adapting sales and marketing efforts to the target company’s culture, closely followed by restructuring of the workforce.

Interestingly, despite the risks inherent in any M&A deal, the major risks identified are all essentially execution risks, which are within the control of the acquirer and can be mitigated through a robust deal process and proper preparation.