80% of mergers and acquisitions fail. Mergers and acquisitions can fail for a number of reasons. However, many of them are preventable if leaders know what to look for based upon evidence-based management. Following are the top five according to science.
Integration Difficulties. The number one reason businesses fail is due to unhealthy organizational cultures. This is amplified in M/A when two organizations don't have similar cultures. Employees resist the change with many comments of, "this is isn't how we used to do it". Matching organizational cultures is paramount for M/A to succeed.
Empire Building. Too big to fail is alive and well as organizations have seen time and again others be bailed out because of their size. However, this is only true if the industry is deemed vital to the economy or if a bailout would increase presidential votes. Conglomerates have been shown to be a large drag on firm performance, but many CEOs want to increase the size of their organization as it may increase their compensation. Please see the video at the end for how badly most empire building turns out.
Overestimation of Synergies. This can occur during due diligence, integration of the firms, or too much diversification. 1+1 must equal 3, otherwise, firms will end up in the 80% pile of failed M/A. Companies must be very transparent with themselves and seek input from many stakeholders to assess the viability of the blended companies. Too often, shareholders and stakeholders are sold on the incredible synergies that will arise when usually empire building is going on.
Large or Extraordinary Debt. Acquiring organizations with little financial slack increases the probability of the acquisition failing. Cash or a favorable debt position allow the acquirer to make mistakes and learn during the integration rather than being strapped from the beginning.
Complementary Resources. Conglomerates or organizations that become too large cannot create synergies throughout the organization creating financial drag and end up being broken up and sold off. The ability to combine resources throughout an organization can create scale and cost efficiencies that cannot be replicated by other competitors.
Research suggests their are other reasons that drive 80% failure rates in the M/A market, but these five are weighty variables that can be avoided to increase the odds of success.
Dr. Jason Cavich