Chanticleer Print article. Jul 22, — Save Log in or Subscribe to save article. Measures of failure The measure of failure included the following: a meaningful write-down of the acquired business; the debt burden forces the acquirer to raise equity or sell assets; selling the business for less than it cost; a key product is decommissioned; and evidence of fraud or serious governance concerns arising from the deal.
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Email Tony at tony. License article. This is probably the most common reason for the failure of transactions. In publicly listed companies, this usually means a premium over the share price. Overestimating synergies goes hand-in-hand with overpaying in a transaction. And revenue synergies are no less complicated to achieve. The importance of due diligence can never be emphasized enough, partly because so many firms are evidently keen to get it over with as soon as possible.
This creates obvious agency problems. A good rule of thumb here is that the less simply the motive for the transaction can be explained, the more likely it is to be a failure.
At the other side of this equation, are those transactions that require significant resources on the part of the acquiring firm.
Loading up on debt to acquire any firm creates a pressure from day one to cut costs - never a good start for a deal, and often the beginning of the end. The media industry was about to undergo the biggest shake-up in its history, from which it is only now beginning to show signs of recovery. Suppose the managers of two hotel chains are considering a merger. It makes sense on almost every level - financial, cultural and strategic. There is no overlap in geography, meaning regional hotel chains are joining to create a national chain.
On paper, it is perfect. As soon as the deal closes, a pandemic sweeps the world, tourism stops and money dries up. The most obvious reason for failure is left till last. Post-transaction failures can take a number of forms, including:. Poor due diligence: While you don't want to overdo your due diligence, it's still important to be thorough. Your due diligence research should include:. Without proper due diligence, it's easy for the buyer to inherit liabilities and expenses that would otherwise cause them to call off the deal — or at least change the terms — if they were aware of them.
Cultural mismatch: Sometimes, the failure comes from a simple cultural mismatch. Sometimes two companies' cultures are compatible.
Sometimes they are not. This mismatch in corporate culture could lead to friction among teams or limit their effectiveness. For instance, the buyer might impose rules or practices upon the seller's team that get in the way of their usual modus operandi, therefore limiting their effectiveness and profitability. Again, neither side is necessarily more right than the other; they just have different ways of doing things that end up clashing down the road. Financial difficulties: There may be financial difficulties that result from the acquisition.
The seller might not yield enough profit to make the transaction worthwhile, for instance, ultimately causing the buyer to divest them or write them down.
Alternatively, the seller might grow too fast. If the buyer doesn't have enough resources to support that growth — or if they haven't planned to provide those resources — it can cause tensions to rise and put a stranglehold on the bought company.
Poor integration: Finally, the transaction itself might be sound in terms of value and purpose, but the integration process could still be mishandled. During the due diligence process, the buyer should identify the personnel, processes, products and so forth that allow the seller's company to operate and make plans to accommodate them.
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