Mergers and Acquisitions Execution – A Case Study on Deals That Went Wrong

Introduction

Mergers and Acquisitions are often a very important part of business growth or the harvesting thereof. Unfortunately many of these mergers and acquisitions are not successful. Some don’t make it to the execution phase due to negotiation failure.

Over more than a decade Ventex Corporation observed and advised on exit strategies for companies. The company also facilitated various mergers and acquisitions. This case study highlights the importance of having a well thought-out and executed merger and acquisition strategy. It shows how apparent small issues can sink merger and acquisition negotiations or the execution thereof. The following reasons for failure (with corresponding cases) are discussed:

  • Dishonesty.
  • Reliance on owners.
  • System integration failure.

Dishonesty

Dishonesty is not sustainable. The basic principle holds: “you can fool all of the people at times and some people all the time, but you can not fool all the people all the time”. Important facts that are conveniently left out in discussions or direct dishonesty have the tendency to come back and haunt the guilty party.

The sole-owner of a small, but extremely profitable and successful manufacturing concern decided at the age of 55 to exit via a merger and acquisition. Due to the specialized nature of the business it made tremendous strategic sense for a very large listed entity to acquire this company. They received the actual figures from the entrepreneur and was very impressed and keen to do a deal. Unfortunately further analysis showed that the entrepreneur used a different set of accounts for the receiver of revenue in order to pay less taxes. The difference was considerable and the big company decided to withdrew from negotiations. Good corporate governance and their public responsibility did not allow them to pay much more for the company than what the official financial statements showed. The dishonesty (with the receiver of revenue) was also a serious concern.

By cheating the receiver, the entrepreneur lost an excellent opportunity to exit. He also lost out on an excellent monetary compensation. This would have been much more than the tax money that he did not pay. He currently have serious problems with the receiver that keep him awake at night – at a time that he really could reap the benefits of building a successful business.

Reliance on owners

Entrepreneurs tend to love the feeling of freedom and to be in control. Quite often they don’t delegate enough. This can be due to the fact that the knowledge reside in their experience, there are no right candidates, the business is too small, the owners too busy or they don’t know how to. Unfortunately the potential value of the business is less in this situation than it otherwise would be. To increase value a system need to be implemented where reliance are not too much on the owners.

This phenomenon is very prevalent in entrepreneurial businesses. We have seen many frustrated business owners in this regard, especially in the services sectors (such as training and consulting). One of our more powerful clients that have this problem is, however, in manufacturing. This company is a powerful medium-sized and well-respected company. The company is handicapped in merger and acquisition negotiations due to the strong emphasis on the entrepreneurs. The potential acquirers all want the owners to stay for very long periods and they are also only willing to pay a smaller multiple for the company due to this dependency.

By not having a proper system, where successors are properly trained, this highly talented and successful entrepreneurs have lost out on several opportunities to harvest through a merger and acquisition. Their company is also worth less than what it could otherwise be.

System integration failure

During the merger and acquisition process companies tend to focus on the perceived benefits and synergies, contracts, on getting a good deal and to ensure that everything is the way that it seems to be (through a due diligence). The integration of systems are often seen as an issue to resolve after the deal is concluded. Many merged companies fold due to system integration issues.

One of our clients, a medium-sized IT company merged with a big listed company. The listed company was on an acquisition trail and bought several IT companies. They decided that it was important for everybody to be on their IT system. The system integration – merging several IT systems (that was customized to suit the individual companies) – proof to be too much. The management of the different companies spent most of there time on this (and on reporting). They did not have the time to spent on their strengths – the rationale behind the mergers. The big company was finally liquidated and everybody else lost out.

By not planning properly for system integration – or devising a system around it – dearly cost the listed company. Our client did get a good initial amount, but many dreams were shattered. The big final payoff also did not materialized (through this deal).

Summary

A merger and acquisition can be a wonderful new dimension that a business move into. It is, however, important to not go into it blindly. A merger and acquisition should diligently be managed (preferably as a project) and potential problems need to be addressed.

Apparently small things can make the difference between success and failure thereof. This case study highlights the problems associated with dishonesty, owner dependency and system integration. We have also seen many mergers and acquisitions fail due to factors such as greed, no risk management and cultures that is incompatible (where proper change management is not used).

Copyright© 2008 – Wim Venter

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