Mergers and acquisitions (M&A) are a common way for two companies to join forces with the expectation that the new company will be better than the sum of its parts. The new company expects profits to grow as a result of lower production costs and an expanded market share.
However, things don’t always turn out as planned. In fact, the high rate of M&A failure attests to the risks businesses undertake when they attempt to combine operations. The recent split of the mega-merger between Kraft and Heinz after less than 10 years demonstrates that bigger isn’t always better.
Ending a corporate merger can result in financial losses, damage to brands and reputations, and operational disruptions. Minimizing the negative impact of a failed merger requires strategic planning and preparation. The business and commercial litigation team at the Texas law offices of Fee, Smith & Sharp LLP helps businesses protect their interests from the repercussions of an unsuccessful merger.
Why Corporate Mergers Fail
Combining companies through a merger or acquisition can benefit the companies, shareholders, and consumers. Globally, M&A is on the rise again after being down in recent years, following an all-time high of more than 58,000 in 2021.
While blending two companies may sound like a good idea, the reality is that the majority of attempted unions don’t end up achieving the expectations that made the original idea so appealing. Research shows that between 70 and 75% of all M&A fail.
Why is there such a high M&A failure rate?
The answer has a lot to do with human behavior and not understanding what will be required to create the synergies that will lead to success. The biggest reasons M&A deals don’t achieve their anticipated goals can largely be avoided or minimized with adequate attention to key details.
Why M&A fail is usually because of one or more of the following shortcomings:
- Inadequate due diligence when evaluating the financial, legal, market, or other potential risks
- Poor communication and a lack of transparency between management and employees/stakeholders
- Inability to successfully integrate the cultures of the companies
- Unexpected costs and/or reductions in value
- Not recognizing and appreciating differing business operations, values, and goals
- Unanticipated regulatory issues
Understanding the risks involved in M&A and taking steps to mitigate them as much as possible does not guarantee success. Still, it will definitely reduce any negative impact if the venture fails to produce the expected results.
The Kraft Heinz Company Split
In September, Kraft Heinz announced it would split the two companies to “accelerate profitable growth and unlock shareholder value”. The company cited operational complexity as hindering its ability to effectively allocate capital to prioritize initiatives that would drive better performance.
Kraft and Heinz merged in 2015, backed by big money, with the ambitious goal of increasing operational efficiencies, reducing costs, and boosting shareholder returns. So, what went wrong? The consensus is that an overly zealous focus on cost-cutting and short-term results caused product innovation, brand building, and marketing to suffer, resulting in billions of dollars in losses.
Focusing solely on the bottom line, rather than on people, costs the company relevance and trust among consumers. Consumer preferences were shifting, and the company decided to rely on existing brand loyalty rather than encourage long-term growth by developing new products and revitalizing its marketing strategies.
Steps Businesses Should Take to Ensure the Best Possible Outcome from a Failed Merger
The best defense against a failed merger or acquisition is a well-planned and implemented offense. Since M&A fail most of the time, companies must take care at every step of the process to give the new company the best chance of success. Include a detailed plan specifying how and when the businesses will separate if the merger fails to achieve the desired goals. High hopes are no substitute for doing the homework and being prepared.
When the following steps are completed thoroughly and with realistic expectations, there is a better chance that the new business can establish a solid foundation and realize the anticipated synergies that support long-term growth.
Due Diligence
Investigating a company before a merger must be thorough and consider all key components that could affect the venture’s success, including financial, legal, organizational, operational, cultural, and marketing factors. Accurate valuation is one of the most important aspects of due diligence, as inaccuracies can lead to deal failure, financial loss, and reputation damage.
Have a Strategic Plan for All Contingencies
Upon deciding to proceed with M&A, having a comprehensive plan can help identify more quickly when things are not on track and implement corrective action so the company can continue to integrate and keep moving toward its goals.
Be Realistic About The Cooperative Expectations
Overestimating the synergies to be realized in M&A is a significant contributor to failure. It takes time to integrate companies, and sometimes it can get worse before it gets better. Fortune often favors those who under-promise and then over-deliver, far and away above those who over-promise and under-deliver.
Take Cultural Integration Seriously
Assessing company cultures and what will be necessary to integrate them successfully is part of due diligence. Implementing a successful integration plan requires meaningful communication and the flexibility to find new solutions that promote retaining key employees and the attainment of synergy goals.
Management Must Stay Involved In the Process
Although third-party advisors can bring expertise to the M&A process, company owners and managers still need to be very involved to ensure business continuity and employee retention. Employee turnover can be substantial during and after a merger or acquisition, removing the knowledge, skills, and experience that are vital to a successful transition.
By Failing to Prepare, You are Preparing to Fail
Whether Benjamin Franklin actually said that is apparently the subject of some debate, but the message is a good reminder of the importance of preparation for achieving a successful outcome. At Fee, Smith & Sharp LLP, our goal is to help our business clients in Austin, Dallas, and Houston plan for success in their ventures and ensure their interests are protected when outcomes are not as planned.
