Don’t Let Mergers and Acquisitions Be Your Achilles Heel

The Fed recently released its survey of the economy, known informally as the Beige Book. The central bank’s Beige Book economic report is made up of anecdotal information collected by the 12 regional Fed banks through May 22nd. It painted a generally upbeat view of growth in the U.S. in the period from early April through late May, but optimism waned somewhat in a few districts, according to the report released on Wednesday.

According to Harvard Business Review, between 70% and 90% of acquisitions are failures.

The New York Fed said that economic activity had flattened in recent weeks, while Boston said that only half of retail and manufacturing contacts reported year-over-year revenue gains. So, with flat growth and a low unemployment rate, companies are struggling to find the employees to hire for organic growth, and are rushing even more quickly to mergers and acquisitions as a solution.

Mergers and Acquisitions (M&A) is a time-honored strategy to grow a business. Want to enter a new market or quickly add quality people to your firm? Simply buy or merge a company into your existing operations and cash in your bonus check. Within a few quarters, you can add valuable new expertise, multiply your resources, and reach entirely new market segments. Like any business growth strategy, M&A comes with risks. According to Harvard Business Review, between 70% and 90% of acquisitions are failures. A half-baked acquisition can create major operational headaches, damage your reputation, and can even kill your entire company.

Many studies point to the high rate of M&A failure as resulting from one or a combination of 3 factors:

  1.  Cultures do not align – The result is often distrust, hard feelings, and failed execution.
  2.  Too large of a brand shift – The result is a dilution of original, strong brand identity.
  3. Differing Strategies – The result is that you end up sacrificing non-core services or a wide swath of industries that you choose not to serve.

What is most interesting to me is that none of the above factors are financial, yet most companies’ M&A decision inputs look at financial models only. Company executives get blinded by revenue projections and new market ROI’s, and fail to evaluate non-financial factors, which can really turn a merger or acquisition into a lemon.

If you are serious about a M&A growth strategy, then please get a handle on the non-financial factors and impacts during your due diligence, and don’t be afraid to walk away if it is not a right fit.