San Diego Mergers and Acquisitions: Common Reasons Why Acquisitions Fail
Mergers and acquisitions (“M&A”) and other efforts to sell and buy businesses in San Diego are almost always complex. Even the smallest business with the most straightforward of business models involves an array of questions with respect to financing, inventory, proper pricing, employees, real estate holdings or leases, compliance with permits, licenses, etc. With all the moving parts, it is not surprising that about half of M&A efforts fail. See report here.
We here at San Diego Corporate Law have extensive experience with M&As. There are many reasons for an M&A transaction to fail, but the most common reason is cost. Conducting the due diligence is directly expensive, but there are indirect costs in lost productivity and lost opportunities. In addition, an early breakup can be less acrimonious. Thus, it is important to watch for “warning signs” during every stage of the M&A process. If the “warning signs” pile up, it may be better to put an end to the efforts. Here are some common reasons why M&As fail.
San Diego Corporate Law: Purpose of M&As
In general, San Diego M&As have two purposes:
- Marketshare growth from the merger beyond the combined size of the two companies based on new products, new territory, new markets (downstream, upstream, online, etc.), new customers, etc.
- Profitability growth based on marketshare growth, economies of scale, use of shared methods, reduction of redundancy, consolidation, debt restructuring, etc.
San Diego Corporate Law: Common Reasons Why M&As Fail
When M&As fail, they fail because those involved lose focus on the purpose or because they have miscalculated various aspects of the deal that are/were expected to provide the growth in marketshare or profitability. Common examples include:
- Acquisition/merger costs are too high — this might include the costs of “cashing out” various owners, financing costs, integration costs, and similar
- The expected costs savings are insufficient to justify the merger — that is, inventory consolidation or reduction of redundancy cannot be achieved or, if achieved, will not save the costs that were anticipated
- The expected new markets are insufficient — desired growth will not materialize
- Planned-for debt restructuring cannot be achieved
- Key employees cannot be retained (or jettisoned)
- Failure to manage branding and customer relations causing loss of customer loyalty, confusion, and corresponding loss of sales
- Same for third parties, vendors, and other market/industry business partners
- Misunderstanding with respect to whether this a “merger” or an “acquisition” and the expected roles, duties, and control authority of the relevant personnel after the transaction is closed
- Third party agreements cannot be reached — such as with a commercial landlord
- Culture clash or vastly divergent business methods
San Diego Corporate Law: What to do if an M&A Fails?
First, the risk of a failed M&A should never deter San Diego businesses from exploring M&A options. When a merger or acquisition “works,” the resulting re-invigorated business is generally extremely successful for both companies involved. Second, as noted above, it is best to put an end to M&A efforts as early as possible to avoid wasting resources on a deal that will not work.
Third, after the M&A efforts have been terminated, your San Diego business should continue running. No M&A effort should be so costly as to imperil the running of either business. Obviously, some M&A efforts are undertaken to save a “failing business.” Under those circumstances, the failing company may be facing bankruptcy. That actually presents an opportunity for the acquiring company as the goals of the M&A might be accomplished through negotiations with the bankruptcy trustee.
Finally, your San Diego business should keep trying. There was a purpose to the M&A efforts — growth of your business. Maybe acquiring a different business can accomplish the desired goals.
Contact San Diego Corporate Law
If you are considering a merger or acquisition for your San Diego business, you are going to need the help of an experienced and talented business lawyer like Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has the experience to provide all the legal services needed for any mergers and/or acquisitions. Contact Mr. Leonard via email or by calling (858) 483-9200.