Question

 What do you think are the reasons for failure of merger and acquisition?

Answer 1

Following are the reasons for failure of merger and acquisition:

1. Unrealistic price paid for target: Merger and acquisition involves valuation of the target company and paying a price. Many a time the price paid to the target company is much more than what should have been paid. Shareholders of the target company are benefited, the shareholders of the acquirer end up on the losing side.
2. Difficulties in cultural integration: Merger involves combining of two or more different companies with different corporate cultures, styles of leadership, differing employee expectations etc. If the merger is not dealing sensitively with the companies people and their different corporate cultures, the merger may be a disaster. For example, the merger of Daimler Benz with Chrysler. While Daimler-Benz’s culture stressed on a more formal and structured management style, Chrysler favoured a more relaxed and freewheeling style.
3. Overstated synergies: Mergers and acquisitions assumed to be for creating synergies through increased revenue, reduced costs and improvement in the investment intensity. Overestimation can lead to failure.
4. Integration difficulties: The combined firm or entity has to adapt to a new set of challenges given by the new circumstances. Plans are thus prepared to integrate the operations of the combining entities. This is done on the present information. If the information available is inadequate, integration becomes difficult.
   (a) Poor business fit: Mergers and acquisitions also fail when the products of the merging firms do not fit into the acquirer’s overall business plan.
5.  Inadequate due diligence: Due diligence helps in detecting financial and business risks that the acquirer inherits from the target company. Inaccurate estimation of the related risk can result in failure of the merger.