This article is written by RIDHIMA SINGH LL.B HONS – 1ST YEAR ,ALLAHABAD UNIVERSITY during her internship at LeDroit India.
Keywords: Business Fit, Due Diligence, Complementary Business, unrealistic price, Cultural Integration.
Abstract: Merger and Acquisitions in today’s scenario have been proving to be a great business tool in changing economy and business environment of the world. It really turns out to be beneficial for small entities as they can achieve bigger targets and reach out wide markets through merger and acquisitions. There are several reasons responsible for success and failures of M&A deal which should be carefully looked upon by the acquirer.
Reasons for a successful Merger and Acquisition Deal
- Accurate Business Fit-During Mergers and Acquisition it is really important to consider that the
acquirer business must be in complementary to the business of the target because it helps both to grow simultaneously when the business is same.
- Clear Plan of Action -To run successful business clear and detailed plan should be there. The acquirer should create proper plan about the business activities and target should be achieved after the merger and acquisitions.
- Strong Communication- When two organisations are being merged it becomes really important to keep clarity in communications between employees of both the entities. Strong and Smooth communication creates positive environment which helps in overall success of the merged entity.
- No Hidden Secrets-To carry out successful merger its really important that both the acquirer and the target should maintain level of trust between themselves. The target should not hide any secrets like loans and creditor related.
- Proper Evaluation About the Target- It is really important to properly inspect and evaluate about the data provided by the targets. Due diligence i.e., detailed study of financial statements must be done to avoid further loss.
- Cultural Background- Mergers and Acquisition are mostly done across the globe, thus it becomes really important to match and fit in those cultures. There might be misunderstanding between the employees regarding certain cultural norms. Thus, there should be a proper cultural policy in the organisation that should be agreed upon and followed by both the acquiring entity and the target.
Reasons for a Failure of Merger and Acquisition Deal
- Unrealistic Price for the Target- During Merger and Acquisitions it is really important to evaluate the budget for the target and the acquirer must estimate the benefit that he might get from investment. Overestimation of budget might lead to fewer benefits than price paid which leads to collapse of such merger.
- Difficulties in Cultural Integration- Mergers and Acquisitions deal more likely to take place in international markets thus the geographic location in this scenario plays very prominent role. Due to differences in corporate cultures, there are lot of miscommunications because of which these mergers tend to fail.
- Mismatched Business – It is really important that the mergers must be done keeping in the mind that the target is also dealing in the same sectors/industry as it eases the process. Many mergers fail as they don’t keep up with each other marketing if they are dealing in different sectors.
- Due Diligence- Inaccurate evaluation of data provided by the target sometimes also leads to failure of mergers and acquisition. Due Diligence is the process of in-depth study of entity financial statements, history and cultures. Its poor evaluation leads to inflation in cost price and merger collapses.
- Lack of Proper Communication- During the integration process there might be some employee who are not comfortable working and interacting with the other employees. They might not like the approaches of their seniors and feel negative in communicating about their thoughts. Which creates environment of mis-understanding causing mergers to fail.
- Lack of Clear Strategy- The most common reason for the failure of M&A deal is lack of clear planning and coherent strategy. Most of the M&A deals are focused just on getting it closed without paying attention how they will be implementing strategies. Lack of foresight in planning causes failures of mergers.
CONCLUSION
According to current trend many companies are shifting towards Mergers and Acquisitions as they help the acquirer in increasing market share and lowering operational cost. But all M&A deals don’t turn out effective due to lack of conducting proper due diligence and failed strategy planning. Thus, more focus should be there on proper evaluation and implementation of plans to make M&A deal successful.
