By Around 70-90% of mergers and acquisitions fail, and according to McKinsey, the bigger the transaction, the more likely failure is. A staggering number, to be sure, but a cursory review of the literature will tell you big business seems to expect it.
Clearly, organizations attempting mergers and acquisitions don’t want their deals falling through. However, when it happens, everyone bemoans the loss and then moves on. After all, from the beginning, the odds were stacked against them. Remember, between seven and nine out of every 10 M&As fail.
Even so, an experienced transaction advisory services consultant will tell you failure is and should not be the default M&A outcome. You can mitigate these typical M&A pitfalls with a competent transaction advisory team.
- Integration Failure
When corporate bigwigs conduct post-mortems on failed M&As, one word, like cream, always rises to the top. It’s integration or, to be precise, post-merger or post-acquisition integration.
Integration is the process of bringing two companies together, the acquirer and the target, to achieve synergy in business operations. It is the process of unifying two distinct business entities and their individual components — assets, people, resources, and processes — to realize efficiency and productivity gains and extract as much value as possible from the union.
There are many potential reasons for integration failure.
One of the typical causes is the irreconcilable differences between the merging businesses. For instance, the executives of the two companies may have different leadership and management styles. The two companies may have very different organizational structures and workplace cultures. The integration will only succeed if the integration team can realign one party with the other or reach a compromise that both parties can accept.
The solution to this type of problem is rigorous pre-merger research and planning. If there’s a business goal or executive misalignment between the two parties, the feasibility of business alignment must be carefully investigated and analyzed. Furthermore, if the acquiring party decides to pursue the deal regardless, there should be a thorough and practicable plan in place to ensure the misalignment will not cause the integration to stall.
In some cases, even when there’s business and executive alignment between the two parties, the integration can fail due to poor handover and integration processes. There can be communication and knowledge gaps between the deal and integration teams, and they can prove disastrous.
A possible solution is making the due diligence personnel from the deal team part of the integration team. This is efficient because people from the deal team will know everything about the transaction. Consequently, there is no need for an extended discovery phase, and knowledge transfer from the deal team to the integration team can be seamless.
Additionally, this will ensure no information is overlooked, especially crucial data that might have been mentioned in passing but did not make it to the handover report.
- Incorrect Assumptions
The acquiring company may have incorrect assumptions about its target company. Such inferences can have horrendous consequences, as in the case of Quaker Oats’ failed acquisition of Snapple. It all began in 1993 when Quaker Oats acquired Snapple.
Quaker Oats was not a novice at acquiring a drinks company. It took over Snapple because of its earlier successful acquisition of Gatorade. Its marketing prowess turned Gatorade into a household brand, and Quaker Oats’ established relationships with big retailers and supermarkets meant Gatorade got top billing on supermarket display shelves.
Quaker Oats felt confident it could make Snapple the next Gatorade: an unqualified marketing success.
For its part, Snapple was no fledgling company. It was smaller, but it was gaining force. In 10 years, it grew from a $4 million company to one worth more than $600 million.
Quaker paid $1.7 billion to acquire Snapple, then started working on realizing the synergistic value of the acquisition. It will use Snapple’s network of small distributors, which serve gas stations, convenience stores, delis, and lunch counters, to expand Gatorade’s reach among these distribution channels. Likewise, Quaker Oats will give Snapple more exposure in supermarkets.
Unfortunately, Quaker Oats failed to interview Snapple’s hundreds of small-scale distributors to find out if they’re onboard the planned Gatorade and Snapple distribution channel swap. As it turned out, after the deal had been finalized and Quaker Oats started laying out its plans to Snapple’s distributors, the latter made it clear they did not want to give up the supermarket accounts they won for Snapple, even if it gained them the right to distribute Gatorade.
Additionally, Quaker Oats started selling Snapple in larger bottles. This would make Snapple more money. Since the strategy worked for Gatorade, it should work for Snapple, right?
Quaker Oats’ assumption was proven wrong. Gatorade is a beverage for thirsty people; its customers drank it after a workout or a game, so the bigger sizes made sense. Snapple, meanwhile, initially flourished in lunch counters and delis; people consumed them with their meals, and this lunch crowd did not need big-size Snapples.
These obstacles caused Snapple’s value to plummet. Four years after the Snapple acquisition deal, Quaker Oats took a loss of $1.4 billion and sold Snapple for $300 million.
- Incomplete Information
Due diligence is crucial to M&As. What you don’t know can sink the deal and prevent you from realizing your transaction’s expected value.
Incomplete information was another reason the Snapple acquisition failed so miserably. Specifically, Quaker Oats must not have known, or it must have escaped Quaker Oats’ attention, that most of Snapple’s distributors had contracts that gave them inviolable, perpetual rights. Thus, Quaker Oats could not force them to a channel swap.
If Quaker Oats had spent more time studying Snapple’s distribution network, it might have uncovered this fact. Then, it might have consulted with Snapple’s distributors before proceeding with its purchase.
In another case, several plastic manufacturing companies agreed to consolidate their operations. Its integration plan calls for the closure of one of the merging parties’ plants. The closed facility’s operations will then be relocated to another plant.
The plant closure will mean lower operating costs. Meanwhile, its relocation will improve cost efficiency and maximize the relocation target’s excess capacity.
Unfortunately, the due diligence team failed to uncover critical information. The plant targeted for closure had an existing contract with a client company located next door, and that contract specifically required the plant to remain where it was.
The result? The plant could not be closed and relocated, and the value of the merger was left unrealized.
Charting a Course to Success: Anticipating and Addressing M&A Pitfalls
Integration failure, incorrect assumptions, and incomplete information are just a few of the reasons M&As fail. There are many more potential pitfalls to mergers and acquisitions. And when entire fortunes are at stake — Quaker Oats never fully recovered from its devastating Snapple M&A failure and, in 2001, it became just another subsidiary of PepsiCo — a company thinking of merging with, consolidating with, or acquiring another company must advance very carefully to avoid these pitfalls.
AUTHOR BIO
Ratheesh C. Ravindranathan is the Managing Partner at Affility, a comprehensive advisory services firm assisting clients in the UAE and worldwide with IT, risk and management consulting solutions. Being a specialist FinTech professional with over 20 years of experience, an MBA in Information Systems Management, Oracle Certified Professional (OCP) and a Certified Information Systems Auditor (CISA), Ratheesh is an expert at guiding you through your business’s digital transformation journey, Independent ERP Advisory, and Transaction Advisory for various M&As in this region.
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