The top risks in mergers and acquisitions
Here is a short, introductory article on top risks in mergers and acquisitions. From my experience and discussions with other M&A executives, these are the top risks:
Misguided strategy
Misguided notions about synergies
Cybersecurity
Overpayment
Lack of integration
Unknown liabilities
Indemnification
Lack of communication
Misguided strategy: without a crystal clear and well defined strategy it is hard to execute and check an acquisition for success, but it is also hard to find the right company to acquire. If a company was found, we need to check the strategy fit of the target to make sure we can successfully execute the strategy of the buyer with this specific target company.
Misguided notions about synergies: Many firms enter into deals overly optimistic about synergies and underestimate the time it takes to achieve them. For example, integrating operational processes and workforce can take time. Unrealistic expectations can result in overpayment and excess costs.
Cybersecurity: As a growing threat to mergers and acquisitions, cybercrime is a major concern. Cybersecurity was cited by 53 percent of business executives as a major concern for M&A transactions. Additionally, 65 percent of respondents said that they had experienced "buyer's remorse" after failing to properly assess cybersecurity risks.
Overpayment: A common M&A risk is that a buyer overpays for a target. This increases the costs of the deal and increases the risk to the buyer. It is crucial for the buyer to fully understand the factors that can lead to overpayment. Some intermediaries and internal teams within the target company may pressure the buyer to overpay in order to move the deal along. This can end up negatively impacting the deal and the financial performance of both companies.
Lack of integration: When two companies are merging, one should be cautious of the new company's cybersecurity posture. While mergers are often beneficial, they can also create weaknesses and substantial flaws. These issues can be avoided by carefully assessing the risks involved and developing a comprehensive cybersecurity strategy.
Unknown liabilities: Almost every M&A deal involves unknown liabilities, such as pre-close tax issues or errors in the financial statements. In such cases, lawyers will attempt to address these risks by securing indemnity indemnities for the sellers. These risks can cause the sale to be significantly delayed, especially if they are large.
Indemnification: Indemnification provisions are another issue involving indemnification. Most deals involve multiple target stockholders, so the acquirer must determine how much each shareholder contributes to indemnification obligations. In the case of fraud, the caps are typically higher than escrow. Likewise, the provisions governing breaches of "fundamental reps" are usually highly negotiated.
Lack of communication: According to a survey conducted by AT Kearney nearly two decades ago, lack of communication is one of the biggest risks to a deal. While face-to-face meetings may still be necessary in some cases, technology has made it easier to share information in real-time and securely. Virtual data rooms and project management platforms that are specifically designed for M&A activity make this possible.
In addition to the risks, there are opportunities. As the M&A market continues to grow, mergers and acquisitions are becoming increasingly complex and competitive. Developing an effective post-merger risk management strategy is time well-spent. By planning ahead, you can anticipate problems and mitigate them before they arise.
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Stay tuned for more crisp, introductory articles on mergers and acquisitions.
