10 reasons why deals disappoint

Most acquisitions fail to meet expectations. Here's why.

In today's competitive mergers-and-acquisitions market, where valuations are high and interest rates are low, finance has to move faster than ever. Dealmakers — including finance leaders — must address IT, corporate culture, hidden costs, and cross-border rules, to name a few, and inevitably, something slips through the cracks.

Many companies "wind up with breakdowns and leakage throughout the process, particularly around synergy realisation and integration", said Jim Peko, national managing principal for the advisory services practice at Grant Thornton LLP in New York. In his firm's 2018 deal value curve study, which surveyed 400 high-level executives, only 14% of all respondents said that acquisitions exceeded their initial expectations for income or rate of return.

And one year later, the M&A scene is still in a slump: According to research carried out by global advisory firm Willis Towers Watson in collaboration with Cass Business School in London, for the first time in over a decade, companies doing deals in every region worldwide, on average, underperformed compared with companies that didn't do M&A during the third quarter of 2019.

This prompts the inevitable questions: Why do so many mergers get off track and shatter hopes? What do company leaders do wrong? We tapped Peko and Amsterdam-based Gabe Langerak, Western Europe leader for M&A consulting at Willis Towers Watson, to find out the top ten reasons why deals disappoint. Here are their responses:

Failing to plan and forgetting the purpose. Some companies embark on opportunistic M&A: They may not have an acquisition strategy in-house but are contacted by an investment banker who says, "We think this company would be a perfect fit", noted Peko. Then they haphazardly begin a deal process with no real plan and no idea what they should pay. In Grant Thornton's survey, less than 33% of respondents were clear on the purchase price they should be paying. "With valuations where they are, you don't have a lot of opportunities to make mistakes," he said. And, noted Langerak, companies may lose sight of why they are doing the deal in the first place and what they hope to gain from it — and from that, miscommunication ensues internally. "Make sure you come out of the weeds if you are part of any of the workstreams in a deal," Langerak advised. "Keep that helicopter view."

Being oblivious to cross-border rules. Each country has distinct processes and regulations, and a lack of knowledge can delay or thwart a deal. Some acquirers get blindsided. For example, "If you are buying in Europe, you won't generally be able to change the benefits immediately without going through a workers' representative council," Langerak said. These councils, groups of employees that possess certain decision-making rights within a particular country, often weigh in. "If you want to change pension plans in Germany, you need an airtight case of how this will impact each and every employee — and these can be prolonged discussions," he added. So before you do a cross-border transaction, do your research and possibly hire an adviser.

Not grasping legalese. Sale and purchase agreements are often drawn up by attorneys, and these documents can be difficult to comprehend. Agreements include a lot of data — everything from purchase price adjustments to employee benefits — and certain wording can make things vague and confusing. To avoid future problems, Langerak warned, talk with your lawyers to ensure the language is clear, and understand what it all means prior to closing the deal to avoid any shocks.

Overlooking IT. Deal optimism can deteriorate if IT systems from two separate entities don't mesh. About 22% of respondents in Grant Thornton's survey reported they were "actively challenged" and had an "opportunity for improvement" in achieving IT system compatibility. Today, IT systems "are the lifeblood of the company", Peko said, so it's imperative that buyers do a thorough review of these systems before integration begins. If not, acquirers may face IT compatibility issues and other challenges, which in turn can impact customers, clients, and employees.

Failing to communicate clearly. Blurred communication or lack of communication can send potentially good deals into tailspins, so dialogue between the company and key parties — employees, suppliers, customers, investors — must be clear. Experienced dealmakers create communication plans for addressing these groups early. In particular, "Make sure the employees understand the rationale behind the deal and can get behind that because employee engagement is key to retention and continued productivity," Langerak said.

Underestimating integration time. Some companies miscalculate the length of the integration process and fall short of resources midstream. They planned to complete the integration in 18 months, but it took 36 — and this reduces the value they hoped to get from the deal. "If the integration process goes longer than expected, it probably means there's a lack of focus and lack of resources," noted Peko. "Speed to integration is very important, and that will drive value."

Overestimating synergies. Many buyers misconstrue their anticipated synergies and get into trouble later. For instance, they may forecast a $5 million savings from consolidated administrative costs, but only save $3 million because of flawed due diligence or poor execution. "When you are integrating, if you are not achieving the synergy targets during the integration process, you should reassess and course correct, otherwise you will fail to achieve the value in your deal," Peko said. In its survey, Grant Thornton advocates involving the operations team early to help identify synergies.

Not realising hidden costs. Similarly, many buyers are unaware of unseen expenses that hit them later. Acquisitions often come with change-in-control clauses for senior management; additionally, in Europe, you still often have defined benefit plans and other long-term employee arrangements you may not realise early on, Langerak said. "If you don't do your due diligence properly, your costs will be higher than what you are expecting," he noted. To help avoid these missteps, consider hiring consultants who understand the "local lingo" and legal requirements in each country.

Losing key talent. Many acquirers focus on financial aspects of the deal and forget what really matters: people. Deals can fail to exceed expectations if valuable employees — anyone from a CEO to a software developer to a sales director — leave for any number of reasons. Only 42.7% of respondents in Grant Thornton's survey rated their efforts at key employee retention as strong. Identify key talent during due diligence, and determine your plans for motivating and retaining employees you don't want to lose. "Offering people more money doesn't exactly mean they will stay or, if they do, that they will perform as you expect and require," Langerak noted.

Discounting culture. Most business leaders won't stop deals from progressing because of potential culture clashes, but these struggles can surface when integration begins. Newly acquired employees may feel disenfranchised, like "second-class citizens", Langerak said. New workers may also feel hampered due to cultural limitations within the new company. And talented staff may leave if there's no internal alignment. So do your cultural analysis before the deal closes, and know how to communicate with and reward people who are vital to your company's success. "We can never underestimate the impact of culture," he added. "It's important to understand these issues early on."

Cheryl Meyer is a freelance writer based in the US. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at