Over the last decade, there has been a significant rise of mergers and acquisitions (M&A) within countries and internationally. M&A are common in service and knowledge-based industries including insurance, banking, leisure, and pharmaceuticals. The primary objectives of M&A are to increase and protect a company’s market share, to boost a company’s current performance, and to reinvent a company’s business model thereby helping to fundamentally redirect the company. Despite the focus on the identified objectives, the M&A strategy barely delivers or achieves the expectations and goals in terms of increased profitability, revenue generation, or economies of scale (Bohlin, Daley, & Thomson, 2000). In this case, the focus is on the factors or reasons behind the failure of mergers and acquisitions to achieve expectations.
The issue of misgauging or poor strategic fit during M&A cannot be ignored. In most cases, the acquired companies or organizations are too far outside the acquiring company’s core competency, and for this reason, expectations and set objectives are rarely achieved (Goleman, 2002). For instance, there have been instances where a company whose strength and focus is on selling products to businesses acquires another whose focus is on customer-oriented business. Moreover, it has a common phenomenon that consulting firms acquire software companies with the hope that the acquiring companies will use the software applications to enhance their operations. The acquiring and the acquired companies later discover that their operations and activities are wholly different and that core competencies are ignored (Goleman, 2002). These perspectives result in strategy misfit, which see mergers and acquisitions fail to achieve expectations.
Payment of an over-inflated price for the acquired company is also a factor behind M&A’s failure to achieve expectations. Understandably, if the acquiring company pays a significantly high price in an auction environment, it is highly likely that the acquisition will not show positive or expected outcomes (Price, 2012). An acquiring company may agree to pay a high price for the acquisition based on post-acquisition sales performance. When the expected sales performance is not realized, there is a high probability that the acquitting company may fail to meet its part of the bargain (Vazirani & Mohapatra, 2012). In such situations, the acquired company’s stakeholders including employees may feel demoralized and disinterested in the acquisition paving the way for the failure of the whole process. A perfect solution to this problem and to prevent the failure to achieve expectations, acquiring and acquired companies should structure the acquisitions such that half or more of the purchase price is held back with a focus on achievement of future performance hurdles (Cartwright, 2002).
One of the factors that ought to be taken into consideration during M&A is the cultures of the acquiring and acquired companies. However, two possible occurrences during M&A are the misreading of the new company’s culture and underestimating the difficulties in merging the culture of the two companies. It should be noted that despite being in the same industry, two companies cannot have a similar culture (Price, 2012). When the acquired company is forced to embrace the culture of the acquiring company and vice versa, rebellion, resistance, or demoralization may be witnessed among the staff of both companies, and this would pave the way for the failure of the entire process. Having rebellious, resistant, or demoralized staff would hinder progress or development making it hard to achieve expectations.
The acquisition or merger of two or more companies means that original structures are compromised. The arrival or departure of key people may be witnessed, and this may have an adverse impact on the organizational communication. Unclear and disorganized communication coupled with the absence of key information regarding organizational operations and activities could result in the staff assuming the worst (Price, 2012). From this point, the M&A’s failure to achieve expectations and goals would be imminent. To prevent such failure, it is important that the acquiring and acquired companies communicate clearly, honestly, and consistently. With clear, honest, and consistent communication, staff would not have to worry about organizational operations and activities (Pikula, 1999).
A common problem during mergers and acquisitions is placing emphasis and focus on integration for its sake. The biggest assumption made by acquiring companies during M&A is that integration is good, and this sees the focus shift to fixing things that are not broken or damaged (Goleman, 2002). For instance, the acquired company may have an already established and strong brand, but the acquiring company might insist on improving and enhancing things by replacing most of the acquired company’s operations to have them blend and be in line with the corporate naming conventions. Such replacements may see the imposition of new standard operating procedures that instead of helping in the growth of the company demoralize the team. Moreover, the acquired company’s products or service might be working perfectly well, but the acquiring company might insist on improving or rebuilding it to have it fit into its technical architecture. When these happen, it is likely that the staff will be punished and all product enhancements will be frozen for several years, which makes the achievement of expectations difficult (Layne, 2000). The bottom line is that acquiring companies should not be heavy-handed and strict on acquired companies. If a company was worth acquiring, then the parent company should fund its operations, trust, and encourage it to thrive instead of replacing and overhauling its operations.
Another reason why mergers and acquisitions fail to achieve expectations and goals is the fact that stakeholders do not focus enough on customers and sales (Bohlin, Daley, & Thomson, 2000). A fundamental scorecard of the success of M&A is positive financial performance, which means that it is important to focus more on revenue growth than cost control. Primarily, significant changes in revenue would see the planned cost savings outweighed, and this would be an indication of a company’s success (Tang, 2013). To achieve significant growth, both the acquiring and acquired company should focus on customers by ensuring that their needs and demands are met. When customers are ignored immediately after an acquisition, it is highly likely that sales will drop resulting in confusion among the newly-merged team and customer base (Bohlin, Daley, & Thomson, 2000). At this point, the achievement of the M&A’s expectations would be far from being realized because of the inability to make up the lost sales.
Concisely, despite the increase in incidences of M&A in recent years, their failure to achieve expectations remains eminent. As discussed above, mergers and acquisitions fail to achieve expectations because of poor strategic fit, payment of an over-inflated price for the acquired company, misreading of the new company’s culture and underestimating the difficulties in merging the two cultures, unclear and disorganized communication, emphasis and focus on integration for its own sake, and the companies’ failure to focus enough on customers and sales. For mergers and acquisitions to achieve expectations, addressing the issues or factors identified above is important.
Bohlin, N., Daley, E., & Thomson, S. (2000). Successful post-merger integration: realizing the synergies. Handbook of Business Strategy, 1(1), 225-231.
Cartwright, S. (2002). Why mergers fail and how to prevent it. Business: The Ultimate Resource.
Goleman, D. (2002). Business: The ultimate resource. Cambridge, MA: Perseus Publishing.
Layne, J. (2000). Forging New Families: An overview of Mergers and Acquisitions in the context of organizational change. IRC Press.
Pikula, D. A. (1999). Organizational Culture & HR Issues. Industrial Relations Centre.
Price, J. (Oct 26, 2012). 6 Reasons Why So Many Acquisitions Fail. Business Insider.
Tang, D. T. (2013). The Effect of National Culture on the Labor Productivity of Cross-Border Mergers and Acquisitions.
Vazirani, N., & Mohapatra, S. (2012). Merging Organisational Culture through Communication-‘Post Mergers & Acquisitions’. SIES Journal of Management, 8(1), 31.