This article has been written by Avanish Bangera pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) and edited by Shashwat Kaushik. This article provides insight into the reasons why mergers and acquisitions fail as well as some famous cases of M&A failure.

This article has been published by Sneha Mahawar.​​

Introduction

In the current state of affairs, due to acute competition, it is very difficult for companies to grow on their own. Therefore, companies try to achieve growth through inorganic means, i.e., by either acquiring company/companies or merging with another entity. The mergers and acquisitions transaction takes place between the companies to benefit their businesses through economies of scale, economies of scope, synergising their businesses, opportunistic value generation, increased market share, managing higher levels of competition, access to talent, diversification of risk, faster strategy implementation and tax benefits. The various types of merger transactions prevalent in India are slump sales, asset purchases, and schemes of amalgamation, among others.

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Timeline of mergers and acquisitions

According to the report of the “Macrothink Institute,” world over mergers and acquisition transactions went through several waves or phases, starting:

  • 1897-1904- The objective of the merger was to have monopoly in the market;
  • 1916-1929- The objective was to have oligopoly in the market;
  • 1965-1969- In this period, most of the deals were conglomerate in nature;
  • 1981-1989- This was the period when the concept of hostile takeover began;
  • 1992-2000- In this period, mergers happened in banking and telecom sectors;
  • 2003-2007- In this period, mergers took place in the metals, oil & gas, utilities, telecom, banking and health care centres. 

In the current years, a boom in mergers and acquisitions could be noticed, especially in the Information Technology (IT) sector.

Legal aspects of mergers and acquisitions

Whenever a company acquires or merges with another, extensive due diligence is carried out, such as financial, legal, title (in some cases), intellectual property rights, and many other due diligence exercises based on the requirements of the transaction. In a similar way, even the acquired company carries out its due diligence on the acquiring company with respect to their credibility in the market, their background checks, etc. 

Such mergers can take place either by way of asset purchase or slump sale (Section 2(42C) of the Companies Act 2013) or as per the provisions of the Companies Act, 2013 (“the Act”) provided from Sections 230 to 234 with due process of law through a scheme of arrangement and/or amalgamation.

Why do mergers fail

Despite the fact that merger deals synergise the business, add economies of scale and various other factors that enhance the performance, profitability and increase in market share of businesses, the flip side of the story is that many of the merger deals have miserably failed in the past and can fail in the years to come.

A report from Harvard Business Review titled “Don’t Make This Common M&A Mistake” by Graham Kenny states that –

“According to most studies, between 70 and 90 percent of acquisitions fail. Most explanations for this depressing number emphasise problems with integrating the two parties involved. That’s perfectly true, but my experience suggests that integration problems are particularly severe in cases you wouldn’t necessarily expect when the acquisition is a related diversification, that is, a “complementary” business, which the acquirer understands quite well.”

It is evident from the above that for any merger deal, one of the most important issues that needs to be addressed is the integration problem. Besides the integration issues, there are a lot of other reports that suggest various other factors that lead to the failure of any merger deal. Some of them are explained below-

  • Paying a high price for the acquisition- A company’s valuation is misconceived many times, and an acquiring company ends up paying beyond a tangible value for the target company. 
  • Inadequate due diligence- In many of the merger deals, the acquirer company relies on the target company, wherein the target company only portrays the good parts of the business, thus hiding crucial information that would lead to undervaluing its business or any such risky information due to which the deals might fall through. The acquirer often fails to identify potential risks that may pose a major setback for them.   

Hence, it becomes essential for an acquirer to hire professionals to carry out due diligence prior to acquiring any company. They carry out in-depth due diligence on the target company, scrutinising their accounts, legal and statutory compliance with relation to their short-comings, location and premises with respect to proximity, etc.; information on business competition; the target company’s products and services; contracts; and statutory and legal requirements, among other things.

  • Clarity in understanding the target company’s business- Sometimes even a thorough due diligence of the target company may not be enough to have a successful merger deal. A thorough research and analysis may be required to be carried out by the acquiring company, such as on the target company’s market share, their customers, customer reviews, etc.
  • Poor communication- In a merger deal, the parties’ intent should be clear and honest and they are required to maintain transparency with respect to disclosure of information.  All the doubts should be settled immediately by both parties. This is not the case with many of the merger deals, which has led to their failure. Poor communication has been a common issue that not only takes place between the parties to merger but also within the key managerial person and the employees, because of which they are not able to express their intent, leading to poor interaction between them.
  • Cultural differences- the acquiring company’s inability to implement an appropriate strategy to mix and match the culture of the acquired company may lead to low employee productivity, which further leads to lower profit. Cultural integration should be done so that employees willingly collaborate, share, support and team together with a single motive.
  • Regulatory issues- It becomes important for one to carefully understand the intricacies of the Securities & Exchange Board (SEBI) Regulations and the Companies Act, 2013 provisions and Insolvency and Bankruptcy (IBC) Laws for any merger and takeover deals, as they may cause hurdles at some point in the future if not adhered to. One of such things is that a shareholder causes legal difficulties by dissenting from the approval of the mergers or by disagreeing with the business’s decision to merge, which could result in forcing it to pay appraisals to the shareholders as a remedy.

Besides the above, there are many more deal-specific issues that surface only during the merger process.

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Some failed merger deals

AOL and Time Warner- The reason for the merger failure was that the companies did not envisage rapid change in technology, which led to a decline in the trend of using dial of internet access due to the dot com bubble.

Quaker Oats and Snapple- The merger failed for various reasons, such as paying an excessive price for the deal. Quaker Oats even ignored the warning given by Wall Street, saying that “the amount is excessive to acquire the company.” Besides this, due to bad management, Quaker Oats did not know how to bring in skill sets and utilise the experience to initiate operations in the company. The result is that Quaker Oats has to sell Snapple within 27 months of its acquisition.

Google and Motorola- The merger is an example of the bad functioning of the company from the side of Motorola. The products were bad; the quality was degraded and they did not match Google’s grade.

HDFC and Max Life- This merger failed to qualify under the sectoral guidelines as set out under Section 35 of the Insurance Act, 1938. This Section can prohibit any merger of an insurance company with a non-insurance company. The main motive to enter into the merger was to cut costs and avoid the difficulties of raising an IPO. This example is perfectly suitable for regulatory failures.

Flipkart and Snapdeal- The major reason for the failure of this merger was that Snapdeal had a huge tax liability because of its very complex structure. Secondly, employees did not have unity; they always had negative thoughts or disappointment in themselves. Apart from these, there was a lack of consensus among shareholders, which led to the issue of the differential payout. Moreover, the ‘non-solicit clause’ of Flipkart for five years would create conflicts in the future as it was an e-commerce company. This resulted in Flipkart calling off the merger with Snapdeal.

Conclusion

The number of failures in mergers and acquisition deals that have taken place around the world to date were purely due to the negligence of the parties to research and analyse the deal and ego clashes with the top management. This has set an example and has become an eye opener for all those intending to merge. Despite the failure of some of these deals, mergers and acquisitions have been a booming business worldwide in recent years. Therefore, it is necessary for the parties to the merger to learn from the mistakes that have happened in the past and strictly adhere to crucial issues such as carrying out processes of due diligence in an extensive way, understanding the motive and intent of entering into mergers and acquisition deals, and coming out with a robust strategy and plan by involving all the top management, who should keep aside all the ego issues and work as a team. Apart from this, they should learn to maintain a cultural balance among employees in the newly formed company. 

Although there were merger deals that failed in some transactions, there are certain merger deals that have been most successful. To name some of them – Mittal Steel and Arcelor Steels; Flipkart and Myntra; Tata Motors and Jaguar; and many more.

References

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