Estimates vary widely regarding the percentage of M&A deals that fail to deliver the expected benefits to buyers. But they don’t fluctuate so much that you can’t see patterns:
1) The average buyer’s failure rate looks unbelievably high.
2) The reasons for failure are depressingly consistent.
3) Buyer failures can be seller successes when the buyer overpays. Yet sellers themselves are often caught in the buyer’s failure downdraft when a material share of their sale proceeds is an earn-out.
Failing Says Who?
We define failure as when the buyer doesn’t realize the promised —
ROI either through stand-alone operations, synergies, or at exit;
Strategic objectives —
Market share gains;
IP value;
Other strategic goals;
Deal With It
A Harvard Business Review (HBR) article claims that 70% to 90% of acquisitions fail, while another one states that 60% actually destroy value.
KPMG estimates that approximately 83% of mergers fail to create value, and, similar to HBR, about 53% destroy it.
McKinsey concluded that around 50% go south.
BCG claims up to 70% do.
On average, these investigators report a failure rate of about 70%.
Anatomy of M&A Failure
Most observers (including us) attribute failure to a handful of familiar causes that I list below, starting with the most frequent.
Kulture Klash
The buyers’ staff — typically from a much larger company than the seller — can develop a bit of an attitude toward the newly acquired target. It’s similar to a host body rejecting foreign antigens. The problem compounds when nobody’s really responsible for successful integration, that is, when there’s no “deal champion.”
Personal anecdote: the HR department at one of our buyside clients, an inwardly focused Fortune 500 company, ridiculed the gaudily painted AMGs that the company they had just acquired, an executive training firm, annually awarded its top salespeople. Henceforth, they declared, those prizes were to be suspended. At the same time, they announced that the fat commissions those salespeople earned would also be reduced: they exceeded corporate compensation guidelines.
Imagine the acquirer’s surprise when shortly thereafter those same gauche salespeople quit en masse to start a competing firm, thereby collapsing the target. Oh, well.
Rose-Colored Glasses
McKinsey says that, on average, buyers overestimate synergies by 20% while simultaneously generating far higher one-time integration costs than predicted. The combination kills ROI.
Bidding Fever
Something about competing with one’s peers for a prominent target can convert a normally reserved CEO into a would-be empire builder. The word some analysts use is hubris.
Inadequate Due Diligence
Somewhere down this list is the buyer’s failure to uncover financial, legal, operational, or regulatory defects, or even fraud. While major due diligence mistakes can happen (like JPMorgan Chase’s recent $175 million target write-off), in our experience, acquirers with competent, experienced M&A teams rarely make them. Nonetheless, the byword is eyes-open.
In sum, all these factors boil down to one thing: overpayment. And absent fraud, that mistake is on the buyer.
Notice Another Pattern?
Most of the above causes of failure are unique to strategic buyers. Since PE firms usually buy stand-alone companies and let them stay stand-alone, they’re less likely to run into:
Integration problems;
Synergies to overestimate;
A need to prove to peers that they have big-game hunting chops.
Red tape gotchas like antitrust regulations;
Due diligence flubs. They’re rarer for serial acquirers like PE firms. M&A is supposed to be their core competency.
For these reasons, BCG maintains that PE firms fail 30% - 40% of the time (higher than we’d estimate) while strategics hit 80% or more.
We also believe that strategic buyers fumble (i.e., lose) more deals than PE firms do before they close. For ways to dodge that fate, see my Avoid the 7 Most Common Mistakes M&A Buyers Make.
Failing is Good, They Say…
… for the owners of companies that sell to strategics. That’s because, according to academicians, strategics not only tend to pay more than PE groups, but also pay about 20% more upfront.
But for this deal enhancement, sellers have trade-offs: life for the seller’s former employees under a new owner can be a crapshoot; strategics can take much longer to close; and they are less likely to close than financial buyers.
For some company owners, that’s ok. For others, not so much. For more about how the type of buyer – for instance, strategic versus PE – can affect deal speed, structure, valuation, and the fate of employees, see my Find Your Best Buyer.