Would it surprise you to learn that research has shown that 50 to 70% of mergers and acquisitions fail to achieve the expected result (Lovallo and Kahneman 2003)? What about that 90% of mergers result in some type of lawsuit by shareholders (Secher and Horley 2018)?
You may be asking yourself, like I did, why mergers and acquisitions fail so often and why they continue to be undertaken when the failure rate is so high. As to the first question, there has been a plethora of research into why these acquisitions failed to achieve the expected result. Many researchers have investigated pre-merger activities, such as valuation, bidding wars, unreasonable expectations, and poor strategic planning. Other researchers have looked at post-merger acquisition activities to include the integration of both people and systems, poor leadership, and general market conditions. However, there is no consensus as to the main reasons they fail and what failure means to most individuals.
Since 90% of mergers end in some type of shareholder lawsuit, most of the research performed to date was to ascertain whether the value was achieved from the merger, which centers around public companies and share price (Secher and Horley 2018). The share price is indeed a good measurement, but there are so many components to the share price that it is hard to gauge that measurement as effective in determining the overall value of an acquisition. This measurement is almost entirely focused on the acquiring firm's shareholder value. There have been a few recent studies that have attempted to understand whether the acquired firm's shareholders received the value that they expected as well (Mundra 2016).
My understanding of the research to date is that both for the acquiring firm and the acquired firm, the misalignment of value tends to come from the timing involved in the process and the process itself. Consider that on the sell side of an acquisition, it is usually the entrepreneur or a few of the senior team that decides when it's time to sell. That decision is usually based on an emotional decision like retirement or an imperative decision such as liquidity needs. It may not be the best time to sell the company both in the market and with the evolution of the company itself. Remember that if the company is in a high growth period, that is usually a good time to sell, but usually, the company is sold when the product has matured. That's better for the buyer but not necessarily better for the seller.
Alternatively, buyers tend to develop a strategic merger and acquisition process because they must continually increase their portfolio of companies and their revenue to stay in the market and keep share prices high. Because of the target company identification process, it may not be the best time to buy a particular company and the process may be rushed if they feel a bidding war is coming along or if the market is changing adversely to their position.
What does this mean for both the buyers and sellers in the mergers and acquisitions process? This means that the timing of an acquisition or sale should be given more weight in the strategic process that both sides develop. Rarely does the strategic plan give weight to the business cycle of the acquiring or acquired firm and is done as usually once a target firm is identified from the acquisition side, it is put into a project management plan that leads to closing the deal. if during the process, the right time to purchase this company was put into consideration process, it might lead to better expectations of value.
This is also true for anyone trying to sell their company. If all sellers looked at the entire lifecycle of their companies, and then shows the best time to sell for them, that might increase their value expectations as well.
Through all this, the best approach is to have a good advisor that can look at the process objectively outside of the expectations of the shareholders and senior management and define a timing scenario that can help both the buyer and seller.
Donald H Noble is a Partner at the Florida CFO Group specializing in Mergers and Acquisitions, a Professor of Corporate Finance, and a Doctoral Candidate at Saint Leo University studying Mergers and Acquisitions. Don frequently guest lectures at The Institute for Mergers, Acquisitions, and Alliances (IMAA), The Funding Strategies Panel, and other teaching opportunities.
Lovallo, Dan, and Daniel Kahneman. 2003. “Delusions of Success.” Harvard Business Review 81 (7): 56–63.
Mundra, Ankesh R. 2016. “Impact of Mergers on Shareholder’s Value Creation.” Doctoral dissertation, India: Devi Ahilya Vishwavidyalaya. https://www.proquest.com/docview/2314083592/citation/B06D94B9454240F6PQ/9.
Secher, Peter Zink, and Ian Horley. 2018. The M&A Formula: Proven Tactics and Tools to Accelerate Your Business Growth. Chichester, UK: John Wiley & Sons Ltd.