Weighing the Advantages and Disadvantages of Mergers and Acquisitions as a Growth Strategy

Understanding the advantages and disadvantages of mergers and acquisitions is essential if you are considering an M&A strategy for growing your business. M&A deals can provide valuable opportunities to gain access to different markets, expand products or services, better control your supply chain, or otherwise transform your business, but pitfalls like improper valuation and poor integration can make your company an unfortunate statistic in the ever-growing tally of M&A failures.

A Review of the Reasons for Mergers and Acquisitions

To understand the advantages and disadvantages of mergers and acquisitions, one must first address the reasons why M&A is commonly used in business. Several different types of mergers and acquisitions support different kinds of business growth and development.

The word synergy is often heard in conversations about M&A. While M&A deals should ideally create synergy (a combined value greater than the sum of its parts) a more in-depth review of the motivations behind the joining of two companies is important.

Sometimes the acquiring company or both companies are seeking to reduce competition and grow market share, while other deals are born from a desire to grow and improve capacity or production. Some M&A transactions serve the purpose of gaining access to new markets, which can otherwise be difficult. And many M&A deals today occur as a means to obtain access to new technologies, talent, and intellectual property.

There are many reasons a company, whether it is primarily the buyer or seller in an M&A agreement, would choose to consolidate its business with another. The first step for any business considering mergers and acquisitions as a growth strategy, however, should be a careful evaluation of the specific motivations for seeking a merger or acquisition—followed by a thorough, honest review and assessment of the risks of M&A and how feasible or advantageous it is truly likely to be for the business in question.

A business attorney with experience in mergers and acquisitions and knowledge of your specific industry should be part of your team from the early stages of M&A to help you define your goals and assess the potential advantages and disadvantages of mergers and acquisitions.

Why M&A Deals Fail: The Risks of Mergers and Acquisitions as a Growth Strategy

To avoid the pitfalls that place so many businesses in the M&A failure bracket, you must understand why M&A deals fail. The primary reasons for M&A failure fall into one of three overarching categories:

• Inadequate planning and assessment;
• Integration failures; and
• Unforeseen outside factors.

Inadequate Planning of Mergers and Acquisitions

Failure to adequately plan and thoroughly assess the preconditions of a merger or acquisition sets a deal up for disaster from the start. While relying on M&A professionals for guidance is important, company leaders and key stakeholders should also be involved in the identification of goals and planning from the outset and should remain involved throughout the process.

Once an internal evaluation is complete, business leaders must be aware of the potential pitfalls in the identification and evaluation of opportunities. Failure to thoroughly review and understand the financial and organizational position of a target can lead to overestimation of synergies, benefits, and value. Due diligence in mergers and acquisitions requires specialized knowledge, preferably by a team of professionals that includes an informed, experienced business attorney.

Poor Integration in M&A

The next area in which many M&A deals stumble is integration. Again, planning is essential. In this stage, communication and transparency are critical. Particularly in cases in which the companies hope to retain skills and talent, attention must be given to company culture and employees should be informed of the intentions and plans for the future.

The integration of systems and processes is equally important, and possibly more so, depending on the primary goals and conditions of the merger. A thorough plan for business integration should contain details related to all foreseeable integration issues that will need to be addressed. A plan for smooth integration in all areas and mitigation of threats will free your M&A team to address the inevitable unforeseen issues that arise in these transactions.

External Threats to M&A Transactions

The final area of concern for M&A deals is the most difficult to control and preempt. External threats to mergers and acquisitions can come in many forms—from security breaches resulting from poor IT auditing or integration to massive business upheaval and disruption from a natural disaster or a global pandemic.

Threats to digital security are the most predictable of these, and planning can help reduce the risk of these breaches. In an era of digital transactions, cybersecurity audits are becoming a more common aspect of the M&A process.

Other external threats are more difficult to anticipate. We don’t know what the next disaster will be or when it will strike. Expecting that it will, and planning accordingly, is the best way to protect a newly combined company from these external threats.

The Right Business Attorney for Mergers and Acquisitions

To mitigate the risks and navigate the advantages and disadvantages of mergers and acquisitions as a growth strategy, businesses should bring together a team of business, financial, and legal professionals with a thorough understanding of M&A and the industry at hand. Xavier W. Staggs is a business owner and lawyer with Huntington, West Virginia law firm Jenkins Fenstermaker, PLLC. If you need a skilled business attorney for your M&A team, call Xavier at (304) 523-2100 or complete the firm’s online contact form.