M&A: Why do Mergers & Acquisitions fail?
Merger and acquisition activity is really picking up, especially in technology where many of the large tech companies have plenty of cash and are finding themselves losing market share to smaller more nimble competitors.
But while M&A is in the headlines a lot recently, for every two transactions that close, there's another transaction that doesn't (see chart below). That's a surprisingly high failure rate and to be honest this could be a tad conservative - many transactions fail in the very early stages and are probably not counted in the statistics below. Our gut tells us the failure rate is more likely to be closer to 50% when including early stage conversations that don't go anywhere.
To understand how to avoid a busted deal, it's important to understand why so many M&A transactions fail. The chart below represents the results of a survey of investment bankers conducted by Pepperdine University in its annual Private Capital Markets Project report. Pepperdine surveyed 104 investment bankers and came up with the following statistics on the reasons M&A transactions don't proceed:
While there are a multitude of reasons that transactions don't go through, its interesting to see that nearly 2/3 of transactions fail due to valuation gap or unreasonable seller / buyer demands. Navigating unreasonable seller / buyer demands should be easy enough - as long as you have good financial advisors that can help guide you through market terms and legal representation to make sure you don't get caught up on papering the deal.
Valuation gap is clearly a little more difficult to navigate and takes some finesse. To understand best how to navigate these differences in expectations, its interesting to look at how large the gap is. The chart below shows that 95% of the time the gap was larger than 10%, with 68% between 11-30% and 27% being greater than 30%.
Those are some pretty large gaps in value and leads us to ask ourselves how can buyer and seller expectations be so different? The issue is the dance around value normally is towards the end of a process so seller and buyer expectations aren't usually explicit until a lot of time has already been spent on getting a transaction towards the finish line.
So what can companies do to alleviate this problem? We believe there's a number of steps that clients can take to reduce the likelihood of discussions breaking down over value. In particular:
- Figure out likely value upfront - Work with an advisor to get a good sense of value before starting a process. A good banker will do this work for you for free before being signed up and will be able to support the estimate of value with good data from recent M&A transactions and valuations of publicly traded peers.
- Honest feedback about the marketability of the company - Ask your advisor upfront about expected issues with the marketing of the story and how they anticipate overcoming them. Push them hard for honest feedback about the challenges and what issues could impact perceived value.
- Make sure you hit the right buyer base - Getting to the right buyers is critical to maximizing value. Certain buyers will see value that others don't - for example the ability for their sales channel to push your product and increase sales or tax attributes that could increase future combined cashflows. The buyer reach out process should be thoughtful in this regard and really focus on why each of the prospective counter-parties are being contacted.
By hiring an experienced advisor, we believe you can navigate these issues and avoid the problem early on.
About the author
Ed Bryant is the President and CEO of Sampford Advisors. Ed started Sampford because he wanted to provide world-class Investment Banking and Strategic Advisory that large companies have been accustomed to, to small and medium sized businesses. Ed has over 20 years of experience including over 16 years in Investment Banking with Deutsche Bank and Morgan Stanley in Hong Kong, Singapore and New York. In that time, Ed raised in excess of $20 billion in equity and debt capital and completed over $10 billion in M&A transactions.
Visit us at www.sampfordadvisors.com