While the outlook for mergers and acquisitions (M&A) may appear bleak amid the current trade war and economic uncertainty, M&A transactions remain a key strategy for companies aiming to grow, increase market share and expand their presence in new markets and sectors. Although the timelines for transaction planning may be extended, now is still an opportune moment for companies to plan for future success.
However, it is important to acknowledge the sobering reality that many M&A transactions fail to meet expectations, leading to outcomes that undermine the intended growth and value creation.
In their book The M&A Failure Trap: Why Most Mergers and Acquisitions Fail and How the Few Succeed, Professors Baruch Lev and Feng Gu reveal that 70 to 75 percent of all acquisitions fail to meet expectations. Based on a comprehensive study of 40,000 transactions over four decades, this finding should give pause to executives and shareholders alike.
Other sources echo these findings. The Harvard Business Review reported in 2016 that M&A is a “mug’s game,” with a failure rate between 70 and 90 percent. Similarly, a 2019 report by strategy and management consulting firm McKinsey & Company stated that about 10% of all large mergers and acquisitions are cancelled in any given year.
Why do M&A deals fail?
One of the most notable M&A failures was the $37 billion merger between Daimler and Chrysler in the 1990s. Although it was touted as a “merger of equals,” the cultural differences between the two companies were so profound that integration efforts ultimately failed. These differences were evident in various aspects, including decision-making processes, approaches to compensation, and organizational hierarchies.
Chrysler favoured a trial-and-error approach to making decisions, while Daimler relied on meticulous planning. Additionally, Chrysler's management enjoyed generous pay packages that far exceeded those of their German counterparts, and Chrysler’s flat organizational structure did not align with Daimler’s top-down management style.
These fundamental disparities created insurmountable challenges in merging the two companies' operations and cultures. By 2007, the cultural mismatch had taken its toll, and Daimler sold Chrysler to the private equity firm Cerberus for $7 billion.
Here, we see that a key contributor to the merger’s failure is the executives’ tendency to overestimate potential synergies and underestimate integration challenges. The allure of rapid growth or market dominance can blind decision makers to the complexities of merging two distinct organizations. Cultural clashes, operational difficulties, and poor communication can derail even the most promising deals.
Companies sometimes rush into deals without thoroughly examining all aspects of the target company, leading to overpaying and overlooking potential red flags.
The post-merger integration process is equally crucial. Many companies fail to develop a comprehensive integration plan or underestimate the time and resources required, resulting in prolonged periods of uncertainty, decreased productivity, and loss of key talent.
What can be done to improve the odds of success?
To improve M&A success rates, companies must prioritize effective communication:
1. Devise a communications plan: A comprehensive communications plan should address the following three phases, with updates at critical milestones.
- Pre-announcement planning: Develop key messages, identify communication channels, and establish feedback mechanisms.
- Announcement: Communicate the vision, key priorities, rationale, benefits, and high-level timelines for the merger to all stakeholders, including employees, customers, suppliers, and investors.
- Integration: Implement strategies to manage employee concerns, drive cultural adoption, and foster unity and shared purpose among employees.
Regular updates from senior leadership, especially at key milestones, are crucial to ensuring everyone remains aligned and committed to the merger’s success. The updates should serve to maintain momentum and enthusiasm for the merger, communicate progress, address questions, and reinforce the ultimate goals and benefits of the integration.
2. Prioritize transparent communication: Maintain open and frequent communication with all stakeholders throughout the process.
3. Focus on cultural integration: Actively work to blend corporate cultures and address potential conflicts early. This requires clear, consistent messaging and opportunities for cross-company dialogue.
4. Establish a dedicated integration management office: An integration management office with representatives from both companies should oversee the integration process, ensuring clear communication channels and consistent messaging across all levels of the combined organization.
It is also recommended that an integration committee, with representation from all levels of both parties, be created to address concerns and facilitate smooth integration by providing diverse perspectives and ensuring all voices are heard.
5. Hold regular town halls and team meetings: These forums provide opportunities for leadership to share updates, address concerns, and foster a sense of unity among employees.
6. Provide channels for employee feedback: Establish mechanisms for employees to voice their concerns and suggestions and ensure these are promptly addressed. Remember, communication flows both ways—listening attentively to concerns will help shape messaging to stakeholders.
The high failure rate of M&A deals should serve as a wake-up call for the careful planning of merger communications. Clear, consistent, and strategic communication throughout the M&A process, both pre-and post-closing, provides a significant competitive advantage. Conversely, poor communication can lead to failure.
These concerns should not be limited to companies planning to make acquisitions but should also include those approached to be taken over. While the prospect of a transaction at a premium valuation can be attractive and becoming part of a larger entity with an improved market presence can be appealing, a failed M&A transaction can destroy value built over the years. Thorough due diligence is mandatory for all parties involved.
This will become more important if we enter a tariff environment where Canadian companies face economic pressures that drive down their value. Combined with fewer hurdles to completing M&A deals in Canada, this scenario will create more opportunities for U.S. companies to make Canadian acquisitions.
Corporate leaders must recognize that effective communication is crucial for confidently navigating the complexities of M&A and achieving success.
