Mergers & Acquisition Risks

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An acquisition occurs when one company buys another. When two companies agree to combine into one company, they merge. Reasons for these corporate actions include a strategic plan to eliminate competition by acquiring it, a desire to expand into another geographical area or product line or a need to sell or merge the company because of owner retirement or corporate financial difficulties. Both companies face substantial risks. It is not unusual for one company seeking to acquire another to end up being acquired itself, and acquisition plans sometimes become mergers.

Reckless Enthusiasm

Mergers and acquisitions, also known as M&A, begin in strategic planning sessions, when company management decides to acquire another company, to be acquired or to merge. The next step is hiring an investment banker or attorney specializing in M&A work. The entire process is long, time-consuming and stressful. Most M&A specialists say the most dangerous part is project fatigue, which causes company management to decide on a candidate just to get the task over with. Reckless enthusiasm born of project fatigue is one of the main reasons for failures of mergers or acquisitions.

Return on Investment

The wrong acquisition can severely harm a company's profitability. When AT&T acquired NCR, after five years of steadily accumulating losses totaling $2 billion, AT&T finally admitted the failure and sold its stake in NCR. Time Warner's purchase of AOL also ended in years of losses and an eventual spin-off of AOL.

Much debate in the M&A industry centers around whether to perform exhaustive due diligence and negotiations or to just jump in and buy or merge with the first company that looks good, worrying about the consequences later. Deloitte & Touche LLP counsels a broad-based approach involving examination of all parts of a candidate company, with planned risk management at multiple levels.

Corporate Integration

The second main risk in M&A projects is poor integration of the companies. An example of this is when a company acquires another for a specific technology it developed and then in the confusion of integrating the two companies mistakenly closes the department that created the targeted technology asset. Other examples of poor integration are company culture clashes, as in the Daimler Benz-Chrysler merger where German efficiency met head-on with American union work rules. A third example of common integration failure is the loss of important customers who liked doing business with the old company, not the new one. The solution is detailed planning and testing of decisions, with a centralized integration management team that monitors every element of the project.

Legal Surprises

No matter how careful the due diligence effort, nearly every merger and acquisition experiences legal surprises. These are often in the form of lawsuits that the plaintiffs suddenly decide to file because the combination of companies has presented greater assets to attach. You can expect everything from expiring patents, canceled licenses, unreported fraud, infringement on another company's patent and shareholder class action suits. Risk management, in this case, involves the best deal contracts that can be created, which is why good M&A attorneys are so necessary and expensive.